UC-NRLF 


SB    flfl     uq? 


LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 


Class 


A  NEGLECTED 
POINT 

IN  CONNECTION  WITH   CRISES 


By 

N.  JOHANNSEN 


NEW  YORK 

THE    BANKERS    PUBLISHING   CO. 

1908 


Copyright,  1908 
By  N.  JOHANNSEN 


Of 

£ 

OF 


INTRODUCTORY 


The  black  central  field  and  the 
red  ring,  together,  represent  the 
country's  money  supply;  consist- 
ing partly  of  coin,  or  certifi- 
cates backed  by  coin;  partly  of 
bank  notes;  and  partly  of  bank 
money  (deposits  in  commercial 
banks,  "money  in  bank"). 

The  black  central  field  repre- 
sents such  of  the  country's  cash 
funds  as  are  available  for  in- 
vestment, or  for  lending  pur- 
poses; the  red  ring,  all  cash 
funds  not  sq  available  and  all 
other  money  in  the  country.  The 
lines  between  the  centre  and  the 
ring  show  the  movements  of 
money  in  connection  with  the 
processes  of  saving  and  invest- 
ing; the  wider  the  lines,  the 
greater  the  values  they  repre- 
sent 

The  f  Money  Market  (central 
field)  is  fed  principally  by  the 
red  lines,  savings,  which  carry 
funds  from  the  ring  to  the 
centre;  it  is  drained  by  the 
black  lines,  which  carry  the 
money  back  from  the  centre  to 
the  ring.  Most  of  the  black 
lines,  but  not  all  of  them,  rep- 
resent investments. 

The  red  ring  shows,  by  means 
of  the  large  arrows,  the  circu- 
lation of  money  in  the  regular 
course  of  business.  It  is  divided 
into  two  sections,  pink  and 
carmine.  The  latter  represents 
the  money  that  happens  to  be, 
at  a  given  moment,  in  the 
people's  possession  in  the  shape 
of  income:  money  available  for 
expenditures  and  for  buying 
commodities  (Purchase  Money). 
The  pink  section  represents 
money  neither  available  for 


-* 


Showing  the  Giro 
G>  as  affe 

G  S    AND 


<fl  o 
Ui 


15  A-  Mercantile  Investments 
(Extensions) 


For  Explan; 


1 

ation  of  Money 
ted  by 


ra^- 


INTRODUCTORY 

CONTINUED 

spending  nor  for  investment, 
being  needed  by  business  men  for 
carrying  on  their  regular  busi- 
ness. 

Whenever  "Purchase  Money" 
(Income)  is  expended  in  the 
purchase  of  commodities,  say  of 
a  hat  costing  $2.50,  it  leaves  the 
carmine  field  and  crosses  the 
"Purchase  Line"  (which  see), 
becoming  Business  Money  in 
the  hands  of  the  hatter.  When 
he  replenishes  his  stock  and  new 
goods  are  being  made,  that 
amount  will  be  split  up  as  fol- 
lows: the  retailer  retains  $1.00 
as  his  profit;  the  wholesaler 
25c. ;  the  hatmaker,  6sc. ;  the 
manufacturers  of  the  raw 
material  soc. ;  the  transporters 
loc.  Thus  the  Purchase  Money, 
after  passing  the  Purchase  Line, 
will,  in  its  course  around  the 
pink  circle,  reach  in  turn  the 
retail  dealer  (lower  left),  the 
wholesale  dealer  (upper  left), 
the  manufacturer  (upper  right), 
the  manufacturer  of  material 
(lower  right) — each  of  these 
parties  retaining  a  portion  as 
income  (wages  or  profits) 
until  the  whole  of  the  money  in 
its  course  around  the  circle  has 
passed  the  Income  Line  (which 
see)  and  becomes  income  again. 

The  central  field  is  small, 
compared  with  the  pink  field; 
so  are  the  funds  of  the  Money 
Market,  compared  with  those 
employed  by  business  men.  It 
should  be  well  understood  that 
the  former  are  available  for  in- 
vestment, but  the  latter  are  not ; 
they  have  already  found  invest- 
ment— in  the  shape%  of  liquid 
capital  needed  in  business. 


n  see  Page  34 


DIAGRAMS 


SHOWING     HOW    CERTAIN    LINES    OF    THE    CHART 

ARE  AFFECTED  BY  A  CHANGE  OF  CONDITIONS. 

FIGURES  CONJECTURAL. 


Diagram  I. 


Diagram  2. 


Diagram  3. 


DIAGRAM  1  shows  Line  11,  with  its  branches,  the  same  as  in 
the  Chart;  also  Line  17.  It  is  intended  to  represent  the  conditions 
in  the  United  States  at  a  time  of  great  prosperity ;  for  example,  such 
as  prevailed  in  1900.  Practically  all  of  the  Net  Savings  (No.  11), 
put  down  at  three  billions  per  annum,  became  useful  Capitalistic 
Savings  (No.  ii  B),  finding  employment  in  Capitalistic  Investments 
(not  shown  in  the  diagram).  Only  a  nominal  share  of  the  Net 
Savings  became  Impair  Savings  (No.  n  C)  ;  these  effected  tfieir 
return  flow  from  the  Money  Market  (the  black  field)  in  the  shape 
of  Impair  Investments,  represented  by  Line  17. 

DIAGRAM  2  is  intended  to  represent  the  same  lines  as  diagram 
I,  as  they  would  appear  when  affected  by  a  year  of  depression,  such 
as  prevailed  in  1894.  The  Net  Savings  (No,  ir)  have  fallen  from  three 
billions  to  two  billions.  And  of  this  amount  only  one  billion  (No. 
II  B)  finds  useful  employment  in  Capitalistic  Investments,  while  the 
other  billion  represents  Impair  Savings  (No.  n  C),  leading  to  Impair 
Investments  as  represented  by  Line  17. 

DIAGRAM  3  is  intended  to  represent  these  lines  in  an  unpro- 
gressive  country,  like  China.  The  aggregate  of  Net  Savings  (No.  n) 
is  but  small,  and  consists  almost  entirely  of  Impair  Savings  (No. 
ii  C)  ;  so  the  line  of  Impair  Investments,  No.  17,  is  practically  equiv- 
alent to  the  line  of  Net  Savings,  No.  ii.  The  useful  savings,  No. 
ii  C,  put  down  ^as  "nominal,"  are  insignificant,  our  premise  being 
that  the  country  is  unprogressive,  and  no  increase  of  wealth  taking 
place. 


SYNOPSIS. 

"Lack  of  demand"  is  the  characteristic  feature  of 
crises  and  depressions,  especially  of  the  latter;  lack  of 
demand  for  working  forces6  as  well  as  for  commodities. 

The  cause  of  this  lack  of  demand,  at  times  of  depres- 
sion, is  practically  unknown.  Some  economists  have 
tried  to  connect  it  with  the  saving  process1.  If  a  man 
earns  $1,000  and  spends  only  $900,  he  will  create  a  short- 
age of  demand  to  the  extent  of  $100,  and  unless  this 
shortage  were  counteracted,  we  would  here  have  a  clear 
case  showing  how  the  "lack  of  demand"  is  introduced 
into  our  economic  system  as  a  positive  and  definite 
element. 

Our  economists  hold  that  such  counteraction  takes 
place  whenever  the  savings  funds1  come  to  be  invested. 
In  the  course  of  the  investment  they  are  finally  expended 
for  goods  or  commodities.  Thus,  if  the  said  amount  of 
$100  be  applied  towards  building  a  house  and  be  paid  out 
in  the  shape  of  wages  to  the  builders,  the  latter  will  ex- 
pend the  money  in  buying  the  commodities  they  need. 
This  constitutes  a  demand  to  the  extent  of  $100 ;  not  only 
for  goods,  but  also  for  such  working  forces6  as  produce 
the  goods,  or,  as  it  were,  reproduce  them.  This  demand 
fully  compensates  for  the  original  shortage  of  demand 
caused  by  the  saving  activity — a  process  which  can  easily 
be  traced. 

But  will  such  compensation  also  take  place  where 
the  savings  funds  find  no  opportunities  to  be  invested  in 
enterprise  and  new  constructions?3  At  times  of  depres- 
sion such  opportunities  become  scarce  and  the  funds  have 
to  follow  a  different  mode  of  investment  which  is  hard  to 
trace.  Our  economists  maintain,  that  even  then  a  com- 


207679 


ii  Synopsis. 


pensation  is  effected.  They  point  to  a  very  peculiar 
phenomenon  which  can  always  be  observed  at  such  times, 
namely :  the  savings  funds  which  constantly  flow  into  the 
money  market  do  not  accumulate  there  (except  to  a  small 
extent)  but  find  their  way  back  into  the  channels  of  pro- 
duction and  trade.  They  cannot  get  back  into  these  chan- 
nels without  buying  goods  or  commodities  in  some  shape 
or  other.  If  they  do,  they  create  a  demand,  not  only  for 
goods,  but  also  for  working  forces.  The  demand v  thus 
created  by  the  expenditure  of  the  said  $100  will  be  fully 
as  large  as  the  original  shortage  of  demand  ($100)  caused 
by  the  saving  activity. 

From  these  facts,  undeniable  as  they  are,  our  econ- 
omists have  drawn  the  conclusion  that  the  saving  activity 
cannot  result  in  a  real  shortage  of  the  demand,  provided 
the  savings  funds  be  promptly  invested.  This  conclusion 
has  been  universally  accepted  as  correct  and  has  prac- 
tically become  an  axiom  in  modern  economics.  Still,  it  is 
not  reliable. 

The  conclusion  loses  sight  of  a  certain  eventuality.  In 
ordinary  business  each  participant  (working-man,  trader, 
capitalist,  &c.)  furnishes  both  supply  and  demand.  If  A 
supplies  goods  or  services  to  the  C9mmunity  worth  $100 
(or  draws  income  from  the  community  in  any  shape),  he 
subsequently  will  buy  a  hundred  dollars'  worth  of  goods 
from  the  community ;  either  he  or  his  family.  Just  so 
with  B.  Ordinarily,  therefore,  two  sets  of  working  forces, 
A  and  B,  will  furnish  two  supplies  and  two  demands.  At 
times  of  depression,  however,  we  often  find  only  one 
supply  and  one  demand  between  the  two  sets  of  working 
forces,  some  of  the  individuals  producing  without  con- 
suming— others  consuming  without  producing,  their  ser- 
vices being  left  uncalled  for.  This  leaves  part  of  the 
working  forces  without  employment  and  will  disturb  the 


Synopsis.  iii 


equilibrium  between  the  demand  for  working  forces  and 
the  supply  thereof. 

Such  unemployment  always  occurs  whenever  savings 
funds  are  invested  in  that  peculiar  manner  which  char- 
acterizes times  of  depression ;  the  saving  process  then  as- 
suming its  " Impairing  Form."  Exactly  how  the  invest- 
ment takes  place  at  such  times  has  never  been  explained 
by  our  economists,  the  subject  having  escaped  their  at- 
tention. It  will  be  revealed  in  this  present  treatise.  And 
it  will  be  shown  that,  though  the  savings  will  finally  be 
turned  into  goods  and  commodities,  and  though  this  will 
give  employment  to  working  forces,  yet  unemployment  is 
bound  to  intervene  before  this  result  is  reached;  unem- 
ployment as  well  as  "lack  of  demand,"  both  due  to  the 
saving  process. 

Once  we  comprehend  the  dual  nature  of  the  saving 
process — stimulating  business  at  one  time  and  depressing 
it  at  another — we  shall  not  only  get  a  clearer  view  of  the 
causes  underlying  depressions  but  will  also  know  in  which 
direction  to  look  for  the  remedy. 


CONTENTS. 

CHAPTER    I. 

THE  APPARENT  CAUSE  OF  CRISES  AND 
DEPRESSIONS 1 

CHAPTER  II. 

HOW  ARE  SAVINGS  INVESTED  AT  TIMES  OF 
DEPRESSION?    11 

Do  they  accumulate  in  the  Money  Market  ? . . .     14 
Do  they  go  into  Temporary  Investments  ? . .  . .     16 

Do  they  become  Liquid  Capital? 18 

Are    they    absorbed    when    used    for    paying 

debts? 20 

Are     they     used     to     relieve     over-strained 

credits  ?   .  . 22 

Do  they  serve  to  increase  the  expenditures  for 

commodities  ?    26 

Are   they   used   for   the    creation   of   "unpro- 
ductive capital"?    27 

Do  they  find  investment   in   the  purchase   of 

mortgages,  securities,  etc.  ? 28 

Do  they  go  abroad  ? 28 

Do  they  fall  off  in  the  same  proportion  as  the 

opportunities  for  new  constructions  fall  off?     30 
Recapitulation    32 

CHAPTER    III. 

THE  INVESTMENT  OF  SAVINGS  AT  TIMES  OF 

DEPRESSION    34 

Explanation  of  the  chart 34 

Impair   Investments 38 


vi  Contents. 


Basic    Calculation 40 

Impoverishment  of  the  masses 42 

How  is  the  impoverishment  brought  about  ? . .  43 

Multiplying    Principle 43 

The  impoverishment  of  "others"  the  basis  for 

the  investment  of  Excess  Savings 47 

Recapitulation    52 

CHAPTER    IF. 

VARIOUS  DEPRESSION  THEORIES 55 

Lack-of-funds  theory 55 

Excessive  profits 66 

Disproportions  between  economic  factors. ...  69 

Summary  76 

v 

CHAPTER    V. 

THE  "NEGLECTED  POINT"  AS  THE  TRUE 
CAUSE  OF  DEPRESSIONS 77 

CHAPTER  VI. 

PROS  AND  CONS 89 

Investment  demand  not  necessarily  a  demand 

for  working  forces . . . 89 

The  three  phases  of  the  saving  process 92 

Tables  showing  Debit  and  Credit  of  Supply 

and  Demand 96 

Are  the  nations  of  greatest  saving  propensity 

the  wealthiest? ' 100 

Interest  as  indicative  of  a  demand  for  cash 

capital  106 

Interest  as  indicative  of  a  need  of  money 107 

Why  the  demand  for  working  forces  should  be 

measured  in  terms  of  money 108 

The  purchase  of  commodities  as  rewarding 

past  labor 109 


Contents.  vii 


Squandering 110 

Other  forms  of  investment,  besides  the   Cap- 
italistic and  the  Impairing 113 

The  extent  of  the  country's  saving  power.  . '.  .  114 
A  positive  proof  of  the  existence  of  Impair 

Savings 118 

Recapitulation    ' 123 

CHAPTER    VII. 
VARIOUS  FACTORS  AFFECTING  PROSPERITY  126 

The  money  supply 126 

Industry 130 

Enterprise   131 

Foreign  trade 133 

Minor  factors 137 

CHAPTER    VIII. 
RECENT   UPS   AND    DOWNS    OF   PROSPERITY 

IN  THE  UNITED  STATES 139 

Causes  of  the  Panic  of  1893 140 

Leading  features  of  the  Panic  of  1893  and  of 

the  subsequent  depression 141 

The  Return  of  Prosperity 145 

Complications  due  to  Foreign  Trade 147 

Relative  Scarcity  of  Currency 150 

Unhealthy  Basis  of  the  Bank  Money 154 

Excessive    Volume    of    Bank    Money,    yet    a 

Dearth  of  Cash  Capital 156 

Causes  of  the  Dearth  of  Cash  Capital 158 

Inflation  and  Depreciation 160 

Inflation  the  moving  factor 161 

The  Panic  of  1907 163 

The  Subsequent  Depression 165 

What  of  the  Future? 168 

In  Conclusion.  .  .   171 


viii  Contents. 


CHAPTER    IX. 

SUMMARY  OF  THE  FOREGOING 175 

A  brief  review 175 

The  three  degrees  of  business  activity 180 

Economic   fallacies 184 

Once  more,  the  "Neglected  Point" 190 

EXPLANATORY   NOTES..  192 


A  NEGLECTED  POINT 

IN  CONNECTION  WITH  CRISES. 


CHAPTER    I. 

THE  APPARENT  CAUSE  OF  CRISES 
AND  DEPRESSIONS. 

(The   small   figures   throughout    the  book    refer   to    Explanatory   Notes 
at  the  end  of  the  volume.) 

MODERN  economists  make  a  sharp  distinction  be- 
tween crises  and  depressions,  the  one  designating 
the  shock  which  marks  the  end  of  a  reign  of 
prosperity,  the  other  the  period  of  stagnation  in  trade 
which  follows.  In  common  usage,  however,  when  we 
speak  of  a  crisis,  such  a  distinction  is  not  made,  and  a 
theory  purporting  to  throw  new  light  on  the  subject  is 
expected  not  to  confine  itself  to  the  initial  stage,  the 
crisis  proper,  but  to  deal  largely  with  the  subsequent 
depression  of  business — a  usage  which  has  been  adhered 
to  in  selecting  the  title  of  this  book.  In  fact,  the  "ne- 
glected point"  which  I  am  going  to  reveal  is  primarily  a 
factor  connected  with  depressions.  At  times,  however,  it 
has  also  been  the  governing  factor  in  developing  a  crisis. 
Despite  the  common  usage  of  treating  crises  and 
depressions  as  practically  one  and  the  same  thing,  we 
are  justified  in  distinguishing  between  the  two,  for  there 
is  a  radical  difference  not  only  in  their  outward  manifes- 
tations but  often  in  their  origin.  Our  economists  have 
hardly  gone  far  enough  in  this  respect.  They  have 


The  Apparent  Cause 


dwelt  much  more  upon  the  difference"  in  the  manifesta- 
tions than  upon  the  difference  in  the  underlying  causes. 
Indeed,  the  more  important  crisis  theories  now  Qxtant 
assume  practically  one  and  the  same  fundamental  cause 
as  governing  both  crises  and  depressions.  Let  us  see 
if  this  assumption  can  stand  scrutiny,  and  let  us  inquire 
into  some  of  these  theories  in  order  to  ascertain  how  far 
the  apparent  cause  of  the  one  will  answer  to  explain  the 
phenomena  connected  with  the  other. 

The  theory  most  widely  accepted  holds  that  a  crisis 
must  be  attributed  to  overtrading,  too  much  specula- 
tion, extravagance,  etc.,  these  various  causes  absorbing 
too  much  of  the  country's  cash  capital;  and  that  a^ period 
of  restriction  in  enterprise  and  of  retrenchment  in  ex- 
penditures must  follow  to  allow  of  building  up  fresh 
funds  of  liquid  capital.  This  theory,  no  doubt,  is  capti- 
vating on  account  of  its  simplicity  and  apparent  common 
sense.  It  seems  plausible  that  inasmuch  as  the  crisis  is 
marked  by  a  decided  money  famine,  and  inasmuch  as 
before  the  setting  in  of  the  crisis  there  must  have  been 
an  exhaustion  of  the  country's  cash  capital,  a  period  of 
repose  and  of  commercial  depression  becomes  necessary, 
to  permit  of  recuperation.  So  it  is  the  dearth  of  cash 
funds,  occasioned  by  overtrading,  etc.,  which  really  would 
stand  as  the  cause  of  both — of  the  crisis  as  well  as  of  the 
depression.  But  do  we  not  here  encounter  an  absurdity? 
Can  the  dearth  of  cash  funds  be  the  cause  of  the  depres- 
sion where  as  a  matter  of  fact  there  is  no  such  dearth 
while  the  depression  exists  and  where,  on  the  contrary, 
we  witness  an  excess  of  idle  cash  funds?  To  get  around 
this  difficulty  the  theory  had  to  be  enlarged  by  taking  in 
a  new  element — the  loss  of  confidence  incident  to  the 
panic  and  continuing  during  the  subsequent  depression, 
in  consequence  of  which  merchants  and  manufacturers 
do  not  carry  on  trade  and  enterprise  to  the  same  extent 


of  Crises  and  Depressions. 


as  formerly.  This  new  element,  however,  does  not  cover 
the  point  either,  for  confidence  is  really  not  lacking  and 
would  manifest  itself  at  once  wherever  an  opportunity 
for  a  profitable  undertaking  would  offer  itself.  The  fact 
is,  such  opportunities  are  scarce,  owing  to  the  prostrate 
state  of  trade  and  the  lack  of  demand;  and  this  lack  of 
demand,  which  forms  the  gist  of  the  depression,  is  neither 
explained  by  the  loss  of  confidence  nor  by  the  scarcity  of 
cash  funds  which  originally  engendered  the  crisis.  The 
"  lack-of-f unds "  theory,  therefore,  though  fully  explain- 
ing the  setting  in  of  a  crisis,  and  thus  accounting  for  the 
initial  stage  of  a  depression,  will  not  explain  why  the 
depression  should  continue  for  years  in  succession.  A 
depression  may  be  started  by  a  lack  of  funds  and  a  loss 
of  confidence;  but  if  it  were  dependent  only  upon  these 
two  factors,  it  ought  to  disappear  as  soon  as  these  two 
factors  disappear.  When  the  scarcity  of  cash  funds 
gives  place  to  a  plethora,  and  when  the  general  distrust 
ceases,  the  cash  funds  coming  forth  from  their  hiding- 
places,  ready  to  engage  in  any  promising  undertaking, 
then  those  two  factors  which  started  the  depression  exist 
no  longer,  and  the  depression  itself  should  cease.  And 
as  it  does  not  do  so,  there  must  be  some  other  factor 
at  work  not  covered  by  said  theory. 

The    latter,   therefore,    though     accounting     for    the  \ 
phenomena  of  a  crisis,  does  not  account  for  the  phenom- 
ena of  the  depression. 

Another  theory,  more  in  accord  with  the  facts,  has  of 
late  years  found  many  adherents.  It  hinges  on  the 
investment  process,  and  is  based  on  the  observation  that 
wherever  that  process  leads  to  new  constructions  and  to 
the  creation  of  new  productive  capital  and  wealth,  the 
degree  of  business  activity,  and  therewith  of  prosperity, 
bears  an  almost  exact  proportion  to  the  extent  of  such 
new  constructions.  Thus,  the  continuous  avalanche  of 


The  Apparent  Cause 


new  undertakings  and  extensions  as  witnessed  in  the 
United  States  in  the  years  1905,  1906  and  1907  was 
coupled  with  an  unprecedented  degree  of  prosperity; 
ten  or  twelve  years  ago,  when  new  enterprises  were 
launched  only  to  a  limited  extent,  business  languished; 
and  if  we  extend  our  inquiry  to  unprogressive  countries, 
like  China  and  India,  where  there  are  practically  no  new 
constructions  beyond  the  replacements  necessary  to  keep 
up  the  status  quo,  we  shall  find  a  chronic  stagnation  of 
trade  accompanied  with  great  poverty  of  the  masses. 
Wherever  we  look,  we  find  almost  invariably  a  close 
proportion  between  the  degree  of  business  activity  and 
the  extent  of  new  constructions  and  enterprises.  The 
funds  required  for  the  latter  are  furnished  principally 
by  the  saving  process — the  savings  and  surplus  earnings 
of  individuals  all  over  the  country.  So  long  as  these 
savings1  are  invested  in  new  constructions  and  enter- 
prises, they  will  give  employment  and  income  to  the 
working  men  and  business  men  engaged  in  these  new 
constructions,  and  by  means  of  the  well-known  process 
of  action  and  reaction  the  activity  created  in  these 
special  lines  of  business  will  spread  to  other  lines  and 
stimulate  demand  and  activity  also  among  all  the  nu- 
merous trades  which  are  engaged  in  the  broad  field  of 
production  of  commodities — resulting  in  general  business 
prosperity.  But  if  the  savings  are  not  so  invested  they 
can  not  give  employment  to  the  working  men  and  busi- 
ness men  ordinarily  engaged  in  new  constructions,  and 
the  lull  thus  originating  in  the  building  lines  will  react 
upon  general  production  and  trade,  and  engender  a 
depression. 

The  foregoing  theory,  so  long  as  it  goes  no  further 
than  developed  above,  is  undoubtedly  correct,  and  has 
been  accepted  by  most  of  our  economists,  to  that  extent. 
But  the  disagreement  begins  when  considering  the  ques- 


of  Crises  and  Depressions, 


tion,  What  hinders  the  savings1  from  continuing  to  be 
invested  in  that  beneficent  way,  i.  e.,  in  new  construc- 
tions3 and  enterprises?  Many  explanations,  differing 
more  or  less  from  each  other,  have  been  put  forth  to 
answer  that  question. 

Judging  this  question  from  my  own  point  of  view,  I 
can  state  two  specific  causes  for  the  stoppage  of  new  j 
constructions,  the  one  the  very  opposite  of  the  other:  ( 
first,  The  extension  of  new  constructions,  like  railroads, 
factories,  houses,  etc.,  may  have  been  carried  on  to  such  f 
an   extent  as   to   satisfy   the   demand   for  this   kind   of 
capital  goods  for  the  time  being,  thus  causing  a  scarcity 
of  opportunities   for   investment  in   this  direction;   sec- 
ond, the  demand  for  new  constructions  may  become  so 
insatiable  as  to  exhaust  the  funds  of  the  money  market 
and  over-strain  the  credit  facilities  of  our  financial  in- 
stitutions. 

The  first-mentioned  cause  became  operative  with  us 
in  1903  and  1904.  In  the  years  immediately  preceding, 
lavish  expenditures  had  been  incurred  in  all  sorts  of 
new  constructions,  or  in  the  extension  of  old  ones, 
bringing  the  country's  productive  power  up  to  a  standard 
much  beyond  anything  previously  known,  so  much  so 
that  the  demand  for  productive  capital  seemed  to  be 
satisfied  for  the  time  being.  In  consequence,  the  pace 
of  new  constructions  slackened.  The  trades  engaged  in 
new  constructions  began  to  suffer,  notably  the  iron  and 
steel  trade,  and,  by  means  of  the  well-known  process  of 
action  and  reaction,  the  dullness  in  the  one  line  of  trade 
created  dullness  in  most  other  lines  also — all  due  to  the 
primary  cause  that  the  undertaking  of  new  constructions 
was  checked  through  the  abundance  of  productive  capital 
(railroads,  factories,  etc.)  already  in  existence. 

The  second  of  the  two  causes  above  mentioned  may 
seem  paradoxical,  namely,  that  an  excessive,  insatiable 


The  Apparent  Cause 


demand  for  new  constructions  should  engender  a  lull  of 
that  demand.  But  the  process  is  not  difficult  to  under- 
stand. An  excessive  amount  of  new  constructions  will 
absorb  an  excessive  amount  of  cash  capital  and  will  cause 
a  stringency  in  the  money  market,  so  much  so  that  the 
latter  is  constantly  kept  on  the  verge  of  a  general  col- 
lapse. If  on  top  of  this  stringency  anything  should 
occur  that  shakes  confidence,  all  entrepreneurs  will  take 
flight  at  once,  and  the  rush  for  new  constructions  will 
suddenly  change  to  the  contrary.  If  it  does,  the  final 
result  will  be  the  same  as  in  the  former  case,  namely, 
a  lull  in  new  constructions.  As  soon  as  this  lull  sets  in, 
the  working  forces6  ordinarily  engaged  in  creating  new 
productive  capital  and  wealth  are  thrown  out  of  employ- 
ment, and  the  loss  of  income  and  of  buying  power  on  the 
part  of  these  forces  will  react  upon  the  forces  engaged 
in  the  broad  lines  of  production  and  trade,  and  engender 
the  depression.  Then  a  new  factor  sets  in.  While  before 
the  crash  the  country's  productive  capital  was  not  large 
enough  to  fully  meet  the  great  demand  for  commodities, 
it  is  now  too  large  for  the  reduced  demand,  so  the  stim- 
ulus for  new  constructions  ceases.  Thus  we  arrive  at  two 
factors  causing  the  depression,  first,  the  loss  of  confi- 
dence; second,  the  shrinkage  of  the  general  demand,  due 
to  the  lull  in  new  constructions.  The '  one  factor  initiates 
the  depression,  the  other  gives  it  continuity.  The  one 
ceases  to  operate  after  the  panic  is  over;  the  other  oper- 
ates as  long  as  the  depression  lasts,  generally  for  years 
in  succession.  This  being  so,  it  is  evidently  the  second 
1  factor,  the  lull  in  new  constructions,  which  must  be  con- 
sidered as  the  real  basis  of  the  depression.  And  it  should 
<be  noted  that  this  factor  is  entirely  different  from  the 
one  which  originally  gave  rise  to  the  crisis. 

The  foregoing  will  explain  how  a  stagnation  in  busi- 
ness may  be  brought  about  by  either  one  of  two  factors. 


of  Crises  and  Depressions. 


the  one  the  very  opposite  of  the  other — a  lull  in  the 
demand  for  new  constructions  on  the  one  hand,  and  an 
excessive,  insatiable  demand  for  such  on  the  other.  In 
either  case  we  arrive  at  the  same  final  result,  namely,  a 
check  to  enterprise  and  to  new  constructions — the  very 
thing  which,  according  to  the  view  of  most  economists, 
forms  the  governing  factor  of  all  depressions. 

This  view,  however,  that  the  degree  of  business 
activity  largely  depends  upon  the  extent  of  new  con- 
structions that  happen  to  be  under  way  for  the  time 
being,  is  not  exactly  shared  in  by  all  of  our  economists, 
some  of  them  holding  that  it  looks  like  putting  the  cart 
before  the  horse.  According  to  their  view  the  demand 
for  new  productive  capital  and  for  new  constructions, 
such  as  we  witness  in  seasons  of  booming  business,  must 
be  attributed  to  the  great  demand  for  commodities,  this 
being  the  governing  factor;  not  that  the  heavy  demand 
for  commodities  should  be  brought  about  by  the  great 
extent  of  new  constructions  under  way.  The  fact  is,  we 
have  here  a  case  of  reciprocal  action.  An  augmentation 
in  the  rate  of  new  constructions  brings  with  it  an  aug- 
mentation of  the  country's  business  activity;  and  an 
increase  in  this  activity,  in  turn,  will  increase  the  demand 
for  new  constructions;  the  one  factor  constantly  invig- 
orating the  other.  The  governing  factor,  however,  and 
the  one  that  starts  this  reciprocal  action,  must  be  found 
in  enterprise  and  new  constructions.  Suppose  a  railroad 
be  built  in  an  unprogressive  country  like  China;  this 
will  give  employment  and  income  to  many  persons  who 
would  otherwise  remain  idle;  these  persons,  when  ex- 
pending their  income  for  commodities,  give  employment 
to  other  people,  those  who  produce  these  commodities, 
and  these  people  in  turn,  when  expending  their  earnings, 
will  furnish  employment  to  still  others,  and  these  again 
to  others,  thus  giving  rise  to  a  chain  of  action  and  re- 


The  Apparent  Cause 


action  resulting  in  an  enlargement  of  the  community's 
total  business  activity — all  of  this  being  due  to  the 
building  of  the  railroad. 

It  seems  hardly  necessary  to  adduce  further  argument 
to  prove  how  largely  prosperity  depends  upon  this  im- 
portant factor:  enterprise  and  new  constructions.  All 
experience  confirms  the  fact  that  wherever  the  country's 
savings  and  surplus  earnings  are  promptly  invested  in 
this  direction,  there  business  will  be  active  and  labor 
well  employed.  And  experience  equally  confirms  the  fact 
that  wherever  that  all-important  factor  is  dormant,  there 
depression  prevails.  Such  being  the  case,  we  are  evident- 
ly justified  in  concluding  that  the  theory  is  correct  which 
L/(/  holds  that  the  subsidence  of  enterprise  and  new  con- 
structions, and  the  causes  (whatever  they  may  be)  to 
which  the  subsidence  is  due,  must  constitute  the  true 
source  of  the  depression. 

This  theory  seems  quite  plausible,  being  sustained 
by  logic  as  well  as  by  the  facts.  Nevertheless,  it  does 
not  cover  the  ground.  It  gives  only  the  apparent  cause 
of  depressions,  not  the  real  one.  While  we  can  take  it 
for  granted  that  the  presence  of  the  above-named  factor, 
enterprise  and  new  constructions,  will  stimulate  business 
activity  and  prosperity,  it  does  not  necessarily  follow 
that  its  absence  must  entail  depression  and  stagnation 
in  trade. 

There  is  a  flaw  in  the  theory.  It  does  not  sufficiently 
consider  the  question  as  to  what  becomes  of  the  country 's 
savings  and  surplus  earnings  if  they  are  not  invested  in 
enterprises  and  in  the  creation  of  new  productive  capital 
and  wealth.  Why  do  they,  in  that  case,  fail  to  stimulate 
trade  and  prosperity?  If  they  were  not  invested  at  all, 
they  would  accumulate  in  the  money  market,  to  an  im- 
mense aggregate,  which  as  we  know  is  not  the  case. 
They  are  evidently  invested  nearly  as  fast  as  they  accrue. 


of  Crises  and  Depressions. 


And  in  the  course  of  such  investment  they  return  into 
the  channels  of  general  trade,  finally  becoming  scattered 
in  the  purchase  of  commodities.  Why  does  not  this  sort 
of  investment  stimulate  prosperity  as  well? 

Let  us  clearly  define  the  point  at  issue.  If  the  coun- 
try's savings  and  surplus  earnings  become  invested  in 
new  constructions,  they  give  employment  to  a  certain 
class  of  working  forces6,  and  business  prospers;  if  in-- 
vested in  a  different  way,  why  do  they  not  give  employ- 
ment to  some  other  class  of  working  forces,  and  why  do 
we  see,  on  the  contrary,  a  general  lack  of  employment? 
If  we  could  point  out  the  reason  why,  in  the  latter  case. 
their  investment  does  not  give  employment  to  working 
forces,  might  we  not  fairly  hope  to  obtain  new  light  on 
the  subject  of  depressions? 

Let  us  follow  up  this  question.  "We  may  arrive  at 
conclusions  which  shall  show  the  existence  of  a  factor, 
heretofore  unknown,  that  is  responsible  for  the  unem- 
ployment and  the  lack  of  demand  prevalent  at  times  .of 
slack  business. 

The  factor  considered  by  many  present-day  econo- 
mists as  all-important  in  bringing  about  a  stagnation 
in  trade — the  subsidence  of  enterprise  and  of  new  con- 
structions— is  only  the  apparent  cause  of  depressions.  A 
'factor  more  potent  than  this  has  escaped  their  attention. 
Once  we  understand  the  nature  of  this  hidden  factor  and 
find  means  for  checking  its  activity,  enterprise  and  new 
constructions  may  practically  come  to  a  standstill,  and 
yet  business  would  prosper. 


In  the  foregoing,  as  well  as  in  what  follows,  attention 
has  been  given  primarily  to  the  subject  of  Depressions, 
rather  than  to  Crises.  The  latter  are  not  so  difficult  to 


10        The  Apparent  Cause   of  Crises  and  Depressions. 

understand,  in  fact  their  cause  is  generally  well  known, 
so  it  would  be  unprofitable  to  enlarge  upon  their  dis- 
cussion. Not  so  with  depressions.  Their  origin  is  still 
so  much  enveloped  in  mystery  as  to  justify  the  conclusion 
reached  above,  that  there  must  be  factors  at  work  whose 
existence  has  heretofore  remained  unsuspected. 


CHAPTER    II. 

HOW  ARE  SAVINGS  INVESTED  AT 
TIMES  OF  DEPRESSION? 

MOST  economists  hold  that  in  times  of  depression 
the  savings  and  surplus  earnings  of  individuals, 
then  accruing,  will  largely  remain  in  the  money  market4, 
staying  there,  for  years  in  succession,  in  the  shape  of 
"liquid  capital." 

Is  this  view  consistent  with  the  facts?  When  consid- 
ering the  stupendous  annual  aggregate  of  savings  made 
in  a  country  like  the  United  States,  the  retention  of  any 
large  portion  thereof  in  the  money  market  would  repre- 
sent a  huge  sum,  entirely  out  of  proportion  to  the  amount 
of  liquid  capital  actually  found  there  at  any  one  time. 
When  further  taking  into  account  that  every  year  of 
depression  ought  to  increase  that  huge  sum  and  ought 
to  add  to  the  stock  of  idle  cash  funds,  while  no  such  in- 
creases are  revealed  by  the  actual  trend  of  the  money 
market,  the  above  view  seems  to  be  quite  untenable. 

The  behavior  of  the  money  market,  far  from  showing 
a  growing  accumulation  of  liquid  capital  at  such  times, 
will  rather  impart  the  impression  that  the  savings  funds 
flow  out  about  as  fast  as  they  flow  in,  and  that  a  steady 
absorption  of  these  funds  goes  on,  nearly  as  fast  as  at 
times  of  prosperous  business.  True,  they  are  not  invested 
in  the  field  legitimate  for  savings  funds,  i.  e..  in  the  for- 
mation of  additional  wealth  or  capital  goods,  such  as 
railroads,  houses,  factories,  etc.,  for  there  is  but  little  of 
this  kind  of  capital2  built  up  in  times  of  depression.  But 
they  are  surely  absorbed  in  some  way. 

How  this  absorption  is  taking  place ;  how  those  funds 


12  How  Are  Savings  Invested 

can  be  invested  and  transformed  into  capital2  without 
the  concurrent  creation  of  new  capital — this  subject, 
though  of  vast  practical  importance,  has  not  received  the 
attention  which  it  deserves. 


Let  us,  first  of  all,  form  an  idea  of  the  approximate 
extent  of  the  country's  saving  power. 

Between  the  years  1890  and  1900  the  wealth  of  the 
United  States  increased  about  23  billion  dollars,  or  2,300 
millions  per  annum.  Considering  that  during  the  four 
years  of  depression  from  1893  to  1897  the  accumulation 
went  on  at  a  slower  rate,  the  increase  must  have  aver- 
aged, for  the  remaining  six  years  of  the  decade,  as  much 
as  three  billions.  In  the  recent  highly  prosperous  years, 
since  1900,  it  may  have  averaged  not  less  than  four  bil- 
lions.* 

Of  the  latter  amount  we  may  safely  assume  as  much 
as  three-fourths  to  represent  savings,  i.  e.,  surplus  earn- 
ings;! and  we  thus  arrive  at  a  total  of,  say,  three  billions 
per  annum  as  approximately  representing  the  country's 

saving  power. 

•~  '•*'*••'••*' 

Having  thus  approximated  the  saving  power,  let  us 
see  to  what  extent  these  savings  can  find  investment  in 


*  A  recent  Government  publication  states  the  increase  of  the 
country's  wealth  for  the  four  years  1900  to  1904  to  be  about  19  bil- 
lions— almost  5  billions  per  annum. 

t  Not  all  of  the  country's  annual  increase  of  wealth  represents 
surplus  income.  Part  of  that  increase  is  the  result  of  appreciation  of 
property,  due  to  a  rise  in  market  value;  another  part  may  be  the  re- 
sult of  personal  efforts,  for  instance,  where  a  farmer  improves  his 
property  by  his  own  toil.  If  we  figure  the  increase  of  wealth  re- 
sulting from  these  and  other  sources  to  be  one-fourth  of  the  tdtal 
increase  of  four  billions,  this  would  leave  three  billions  to  represent 
the  wealth  derived  from  surplus  income. 

All  of  these  figures  are  guesswork  and  on  that  account  may  not 
be  considered  a  reliable  basis  on  which  to  build  up  an  important 
economic  principle.  Still,  if  they  are  only  roughly  correct,  they  an- 
swer the  purpose  of  this  discussion.  Exact  figures  are  neither  avail- 
able nor  necessary. 

A  further  discussion  of  this  subject  will  be  found  in  the  footnote 
on  page  115. 


at   Times  of  Depression?  13 

the  creation  of  new  wealth  (i.  e.,  in  new  constructions) 
at  a  time  of  prosperity  and  again  at  a  time  of  depression. 
It  is  well  known  that  under  prosperous  conditions  prac- 
tically all  of  the  savings  are  so  invested.  Taking  this  for 
granted  we  would  arrive  at  the  following  equation: 

Saving  power  of  the  people,   per  annum $3,000,000,000 

Savings  invested  in  building  up  new  capital,   or  in  cre- 
ating additional  wealths,   per  annum 3,000,000,000 

Now,  suppose  a  period  of  depression  sets  in,  equally 
severe  as  the  one  witnessed  in  the  years  1893  to  1897. 
Our  capitalists  will  not  go  then  into  new  enterprises  to 
such  an  extent  as  they  did  of  late,  and  will  not  continue 
to  build  up  new  capital  at  the  rate  of  three  billions  a 
year ;  perhaps  not  even  at  the  rate  of  one  billion.  Assum- 
ing the  latter  amount  to  be  sufficiently  near  the  correct 
figure,  and  assuming  further  that  the  people's  saving 
power  will  be  reduced  by  as  much  as  one  billion  dollars, 
owing  to  the  depression,  our  equation  would  be  changed 
as  follows: 

Saving    power    of    the    people    UNDER    FAVORABLE 

CIRCUMSTANCES,    per  annum,    same  as  above $3,000,000,000 

Saving  power,  at  a  time  of  depression,  reduced  to,  say  2,000,000,000 
Savings  actually  invested  in  building  up  new  capital, 

per  annum    1,000,000,000 

At  times  of  depression  only  a  part  of  the  people 's  sur- 
plus earnings  can  still  be  employed  in  the  creation  of 
wealth ;  according  to  the  above  equation  only  one  billion 
out  of  two  billions  of  savings.  What  becomes  of  the  bal- 
ance? 

That  balance,  whatever  it  amounts  to,  is  by  no  means 
barred  from  finding  profitable  investment,  and  is  surely 
turned  into  capital2.  Evidently,  if  one  field  of  invest- 
ment becomes  closed,  another  one  opens.  But  how  this 
is  done;  how  savings  can  be  turned  into  capital  without 
at  the  same  time  forming  new  capital,  this  question  has 
not  so  far  been  treated  in  a  conclusive  manner. 

A  number  of  theories  have  been  advanced  to  explain 


14  How  Are  Savings  Invested 

what  becomes  of  savings  funds  in  times  of  depression. 
Let  us  review  these  explanations,  including  the  one  al- 
ready referred  to,  and  let  us  see  whether  they  can  stand 
scrutiny. 


EXPLANATION  NO.  1 — If  savings  do  not  find  im- 
mediate employment,  they  will  find  it  later  on,  after  the 
depression  is  over;  the  final  investment,  such  as  leads  to 
the  formation  of  new  capital,  being  simply  deferred,  and 
the  savings  meanwhile  remaining  in  the  state  of  "  liquid 
capital. ' '  Thus  they  provide  part  of  the  cash  funds  needed 
at  the  time  of  subsequent  recovery  in  trade.  For  instance, 
the  savings  made  during  the  years  of  depression  from 
1893  to  1897,  so  far  as  not  absorbed  at  the  time,  consti- 
tuted part  of  the  cash  capital  which  was  utilized  later  on 
for  the  numerous  enterprises  launched  at  the  time  of  the 
ensuing  "boom". 

REPLY.— If  the  savings  made  between  1893  and  1897, 
or  a  large  part  of  them,  were  really  left  unabsorbed  for 
the  time  being,  where  were  they  to  be  found?  Did  they 
stay  in  the  money  market?4  As  is  well  known,  savings 
gravitate  toward  the  latter,  appearing  there  as  employ- 
ment-seeking funds.  But  even  if  only  one  billion  dol- 
lars per  annum,  i.  e.,  only  one-third  of  what  the  savings 
at  the  present  prosperous  time  (1907)  amount  to,  had 
stayed  in  the  money  market  in  the  shape  of  "liquid  capi- 
tal seeking  investment,"  a  four  years'  accumulation 
would  have  amounted  to  four  billion  dollars  of  idle  cash 
f funds,  a  sum  larger  than  the  whole  supply  of  money  in 
the  United  States.  As  a  matter  of  fact,  the  money  mar- 
ket took  an  entirely  different  turn.  If  we  take  the  sur- 
plus funds  of  the  commercial  banks  as  a  gauge  by  which 
to  judge  the  amount  of  unemployed  cash  capital  extant, 
we  find  indeed  that  a  moderate  accumulation  took  place 
soon  after  the  panic  of  1893  had  set  in,  amounting  to  a 


at   Times  of  Depression?  15 

few  hundred  millions;  but  this  accumulation  gradually 
disappeared,  so  that  around  1897  hardly  any  of  it  was 
left — showing  that  all  surplus  earnings  had  been  absorbed 
in  the  meantime.  Do  these  facts  confirm  the  above  "  Ex- 
planation"? 

It  may  be  held  that  the  course  which  the  money  mar- 
ket took  during  those  years  of  depression  in  the  United 
States  was  exceptional,  and  that  in  other  periods  of  de- 
pression the  superabundance  of  liquid  capital  has  been 
more  pronounced.  But  the  principal  sign  which  naturally 
ought  to  accompany  the  steady  accumulation  of  savings 
funds,  viz.,  the  constant  growth  of  unemployed  cash 
funds  in  the  money  market,  augmenting  from  year  to 
year  while  the  depression  lasts,  has  never  been  observed. 
As  a  matter  of  fact  the  general  drift  of  the  money  market 
has  not  varied  much  in  other  depressions,  whether  in 
Europe  or  America,  from  the  course  above  described.  And 
in  none  of  them  has  there  been  an  accumulation  of  funds 
at  all  commensurate  with  the  vast  amount  of  savings 
which  flowed  into  the  money  market  and  were  not  ab- 
sorbed in  new  enterprises,  and  which  according  to  Theory 
No.  1  should  have  accumulated  there. 

Much  has  been  made  of  the  fact  that  the  rate  of  in- 
terest shows  a  tendency  to  decline  in  periods  of  depres- 
sion, thus  betraying  a  greater  pressure  of  cash  capital  to 
find  employment.  This  pressure  no  doubt  exists;  but  to 
deduce  therefrom,  or  from  the  declining  rate  of  interest, 
(the  cause  of  which  will  be  explained  in  a  subsequent 
chapter)  that  there  must  be  exceptional  accumulations  of 
cash  funds,  although  statistics  fail  to  reveal  them,  is  an 
unwarrantable  conclusion.  If  such  idle  cash  funds,  run- 
ning into  billions,  really  existed,  they  would  first  of  all 
appear  in  the  commercial  banks.  But  inasmuch  as  the 
weekly  bank  statistics  disprove  the  existence  of  these 
huge  idle  funds.  Theory  No.  1  cannot  be  true. 


16  How  Are  Savings  Invested 

EXPLANATION  NO.  2.— The  surplus  earnings  find 
temporary  employment,  say  in  the  shape  of  loans,  and 
in  many  other  ways,  until  the  return  of  activity  in  trade 
ushers  in  a  new  demand  for  liquid  capital,  and  opens  up 
opportunities  for  permanent  investment. 

REPLY. — It  would  not  be  an  easy  matter  to  point  out 
many  instances  where  surplus  earnings,  or,  as  it  were,  the 
cash  funds  representing  them,  find  investment  of  a  merely 
temporary  nature.  In  most  instances  the  supposed  tem- 
porary investment  will  either  prove  to  be  a  permanent 
one,  or  will  prove  to  be  no  investment  at  all,  so  far  as  the 
funds  as  such  are  concerned.  A  real,  genuine  investment 
of  cash  funds  will  lead  them  to  be  split  up  into  hundreds 
of  fragments;  they  will  go  in  payment  for  goods  or  ser- 
vices, will  lose  the  character  of  cash  capital,  and  will 
leave  the  money  market.  If  they  do  that,  they  generally 
have  found  permanent  investment.  If  they  do  not  come 
to  be  scattered,  they  most  likely  have  found  no  invest- 
ment at  all,  but  have  only  changed  owners — a  subject 
which  will  be  treated  more  fully  further  on.  (See  ''Ex- 
planation No.  8.") 

Let  us  analyze  a  case  of  what  may  seem  to  be  a  tem- 
porary investment.  Suppose  A  saves  $1000  and  lends  the 
money,  for  the  term  of  one  year,  to  B,  who  uses  it  to 
extend  his  factory.  When  so  employed  the  money  is 
turned  into  "fixed  capital"  and,  though  loaned  out  tem- 
porarily only,  is  permanently  invested.  By  the  end  of 
the  year  B  will  not  be  able  to  return  the  money,  except 
with  the  help  of  new  savings,  or  with  the  help  of  fresh 
funds  procured  elsewhere.  He  may  have  saved  up  that 
amount  of  $1000  himself  in  the  meantime;  but  then  the 
money  returned  to  A  represents  B's  savings,  not  A's  any 
more ;  or  he  may  make  a  new  loan  elsewhere,  and  procure 
the  money  from  C,  to  pay  off  A;  then  the  amount  repre- 
sents C's  or  somebody  else's  savings.  In  either  case  the 


at  Times  of  Depression?  17 

original  funds  saved  up  by  A  remain  permanently  in- 
vested in  the  factory. 

Just  so  with  the  great  majority  of  all  other  invest- 
ments, such  as  may  seem  to  be  of  a  temporary  character. 
Take,  for  instance,  the  investment  of  such  funds  as  are 
loaned  out  by  the  commercial  banks  of  New  York  to  the 
business  community  of  that  city,  aggregating  more  than 
a  billion  dollars.  Each  of  those  bank  loans  is  of  a  tem- 
porary character,  and  one  should  think  that  the  invest- 
ments for  which  the  funds  are  used  by  the  borrowers 
must  likewise  be  of  a  temporary  character.  But  as  a 
matter  of  fact,  those  bank  loans  represent,  in  their  en- 
tirety, a  permanent  investment.  The  repayment  of  the 
individual  loans  is  rendered  possible  only  by  the  constant 
issuing  of  new  loans;  though  not  to  the  same  party, 
still  to  the  community.  As  soon  as  the  banks  try  to  re- 
strict the  aggregate  of  their  loans,  they  meet  with  great 
difficulty,  for  the  money  needed  to  repay  the  maturing 
loans  is  not  in  existence.*  That  billion  dollars,  therefore, 
though  seemingly  consisting  of  "liquid  capital,"  turns 
out  to  be  permanently  invested  by  the  business  com- 
munity, and,  broadly  speaking,  no  part  of  it  can  be  re- 

*  The  money  is  not  in  existence!  This  is  true,  despite  the  fact 
that  the  funds  loaned  out  by  the  commercial  banks  are  generally  re- 
deposited  with  the  banks,  and  therefore  not  only  in  existence  but 
seemingly  within  their  reach.  We  have  to  bear  in  mind  that  the 
"money  in  bank,"  i.  e.  the  fictitious  money  represented  by  bank 
credits,  is  the  outcome  of  loans;  so,  if  there  is  a  bank-credit  on  the 
one  hand  there  is  generally  a  corresponding  loan  on  the  other — and 
the  individuals  in  whose  names  the  bank  credits  stand  are  mostly 
not  those  who  obtained  the  loans.  Now,  if  the  banks  wish  to  with- 
draw part  of  the  credit  money  extant  in  order  to  reduce  its  volume 
they  can  not  withdraw  it  from  the  individuals  in  whose  names  the 
credits  stand  but  must  have  recourse  to  those  to  whom  they  made 
the  original  loans — and  since  these  individuals  borrowed  the  money 
to  invest  it  in  their  business,  buying  either  fixed  or  circulating  capi- 
tal with  it,  they  are  no  longer  in  possession  of  same.  These  indi- 
viduals can  maintain  their  solvency  only  by  constant  renewals  of 
their  loans,  eventually  shifting  them  from  one  bank  to  the  other. 
But  if  the  banks  would  try  to  largely  restrict  their  loans,  say  by 
one-half,  and  would  accordingly  refuse  to  make  renewals,  many  of 
those  individuals  would  simply  be  unable  to  pay  their  maturing  obli- 
gations, and  would  have  to  suspend  payments.  And  the  banks  would 
at  once  find  out  that  the  money  needed  for  canceling  a  large  part  of 
their  loans,  say  a  quarter  or  a  half  of  the  total,  is  not  in  existence. 
See  also  footnote  on  page  23. 


18  '  How  Are  Savings  Invested 

turned  for  good  except  by  the  tedious  process  of  saving 
on  the  part  of  members  of  the  community. 

Outside  of  the  cases  here  discussed  there  exist,  no 
doubt,  investments  of  a  really  temporary  character;  for 
instance  where  a  man  loans  out  money  to  help  buying  or 
making  season  goods,  and  where  the  money  is  returned 
after  the  season  is  over,  and  after  the  goods  have  been 
sold  and  paid  for.  Such  transactions  would  be  the  only 
ones  that  properly  come  within  the  scope  of  "Explana- 
tion No.  2 ' '.  They  are  quite  limited  in  extent ;  and,  what 
is  more  important,  they  occur  oftener  at  times  of  great 
business  activity  than  at  times  of  depression — a  fact 
which  economists  will  hardly  dispute.  Explanation  No. 
2  could  stand  only  if  such  occurrences  were  much  more 
frequent  in  hard  times,  so  much  so  as  to  employ  and  ab- 
sorb a  much  larger  part  of  the  people's  savings  than  is 
done  in  times  of  prosperity.  The  reverse  being  true,  Ex- 
planation No.  2  proves  to  be  utterly  inadequate  to  show 
what  becomes  of  surplus  earnings  at  times  of  depression. 

EXPLANATION  NO.  3.— Periods  of  great  business 
activity  drawn  heavily  upon  the  "liquid  capital"  of  the 
community,  so  much  so  as  to  finally  bring  about  an 
almost  complete  exhaustion  thereof.  The  savings  made 
in  the  subsequent  period  of  depression  are  needed  to  re- 
plenish the  fund  of  liquid  capital  available  for  new  en- 
terprises. 

REPLY. — The  fund  of  liquid  capital  can  be  replen- 
ished only  by  the  accumulation  of  cash  funds.  As  nobody 
has  so  far  been  able  to  detect  the  whereabouts  of  such 
accumulations,  which  in  the  course  of  a  few  years  of  de- 
pression ought  to  run  into  billions  if  they  were  to  absorb 
a  large  part  of  the  savings,  the  "replenishing  theory" 
cannot  be  substantiated.  My  replies  to  Explanations 
Nos.  1  and  2  will  also  apply  here. 

The    very    basis    underlying    Explanation    No.    3    is 


at  Times  of  Depression?  19 

wrong,  namely,  the  assumption  that  for  smooth  working 
there  should  always  be  a  large  fund  of  liquid  capital  ex- 
tant, available  for  new  enterprises.  Actual  facts  show 
this  accumulation  to  be  rather  small,  at  active  times  as 
well  as  at  dull  times.  As  a  rule,  savings,  the  source  of 
that  fund,  flow  into  the  money  market  and  flow  out 
again,  but  they  do  not  stay  long  enough  to  accumulate  to 
a  great  extent.  That  accumulation  fund  will  at  no  time 
amount  to  more  than  a  few  hundred  millions,  so  it  can- 
not take  billions  and  billions  to  replenish  it.  If,  prac- 
tically, there  is  no  fund  to  be  replenished,  the  "replen- 
ishing theory "  cannot  stand. 

EXPLANATIONS  NOS.  4  AND  5.— Before  considering 
these  two  Explanations  individually  I  will  say  that  both 
of  them  refer  to  the  over-straining  of  credit  facilities  dur- 
ing the  period  preceding  a  depression  and  to  the  alleged 
necessity  of  a  subsequent  relaxation.  Our  discussion  of 
the  subject  will  be  helped  if  we  first  reach  a  clear  under- 
standing as  to  the  source  of  credit.  There  are  two  dis- 
tinct sources.  The  one  (to  be  treated  in  Explanation  No. 
4)  comprises  such  loans  as  one  individual  will  make  to 
the  other,  or  as  are  made  by  savings  banks,  life  insurance 
companies,  etc.,  i.  e.,  by  such  credit  institutions  as  loan 
out  no  more  money  than  they  receive;  the  funds  orig- 
inally having  accrued  from  the  saving  process.  The  other 
source  (to  be  treated  in  Explanation  No.  5)  comprises 
loans  made  by  the  commercial  banks,  who  create  new 
cash  funds  of  their  own,  of  an  artificial  nature;  bank 
notes  on  the  one  hand  and  bank  credits  on  the  other ;  the 
latter  being  founded  on  the  principle  that  $1,000  loaned 
by  a  commercial  bank  to  an  individual  is  left  by  this  in- 
dividual on  deposit  with  the  bank,  or,  if  transferred  by 
him  to  other  parties,  will  still  remain  in  the  shape  of  a 
deposit  with  some  other  bank  or  banks,  and  will  then  be 


20  How  Are  Savings  Invested 

used  by  the  business  community  the  same  as  cash  funds 
("money  in  bank")  though  not  really  consisting  of  cash.* 
Only  these  artificial  cash  funds,  which  have  nothing  to 
do  with  the  saving  process,  come  in  under  Explanation 
No.  5. 

EXPLANATION  NO.  4.— At  busy  times  too  many  en- 
terprises are  undertaken  "on  credit",  by  incurring  debts. 
The  subsequent  time  of  depression  and  of  "forced 
economy"  is  needed  to  pay  off  at  least  a  part  of  those 
debts.  During  this  time  the  savings  of  the  people  are 
not  employed  so  much  towards  creating  new  productive 
capital  as  towards  cancelling  the  debit  obligations  previ- 
ously contracted. 

REPLY. — It  may  seem  quite  evident  that  if  people  want 
to  pay  off  their  debts,  they  must  save,  and  that  their 
savings  will  be  absorbed  when  paying  off  the  debts.  But 
the  question  arises,  What  will  the  receivers  of  the  funds, 
so  paid  over,  do  with  them  ?  Are  the  funds,  as  such,  really 
.absorbed  when  used  for  the  payment  of  a  debt?  Is  it  not 
.true  that  they  merely  change  owners  and  remain  "funds 
available  for  investment ' ',  only  in  somebody  else 's  hands  ? 
If  A  saves  $1,000*  and  pays  this  amount  to  B  in  cancel- 
lation of  a  debt,  B  may  invest  the  money  in  some  enter- 
prise, just  the  same  as  if  it  had  riot  previously  been  used 

*  This  redepositing  of  the  loans  constitutes  the  reason  why  the 
deposits  in  commercial  banks  represent  part  of  the  country's  money 
supply,  while  those  put  into  savings  banks  do  not.  Savings  banks, 
when  issuing  a  loan,  part  with  the  money  loaned  out;  the  commer- 
cial banks  do  not,  broadly  speaking.  Inasmuch  as  the  funds  loaned 
out  by  the  commercial  banks  are  redeposited  with  the  banks,  they 
practically  remain  cash  funds,  and  are  considered  as  such  and  used 
as  such  by  the  business  community.  Not  so  with  the  deposits  in 
savings  banks;  these  represent,  not  "funds  on  hand,"  but  "funds  in- 
vested"; not  liquid,  but  productive  capital. 

Just  so  with  the  Trust  Banks.  When  confining  themselves  to 
their  legitimate  sphere,  they  part  with  the  money  deposited  with 
them,  and  invest  it  in  securities,  the  same  as  the  savings  banks  do. 
The  deposits  so  invested  should  not  be  considered  as  part  of  the 
country's  money  supply. 

Of  late,  however,  the  Trust  Banks  have  largely  gone  into  the 
business  of  commercial  banks,  not  investing  their  deposits  so  much 
In  the  purchase  of  securities,  but  loaning  them  out,  subject  to  check, 
the  same  as  commercial  banks  do.  Such  deposits,  subject  to  check, 
should  indeed  be  counted  as  liquid  capital,  increasing  the  country's 
money  supply,  and  are  so  counted  on  pages  154,  156  and  164. 


at  Times  of  Depression?  21 

to  cancel  a  debt.  Evidently,  if  B  does  so  invest  the 
funds,  the  latter  did  not  previously  find  investment  by 
the  act  of  A  paying  them  over  to  B;  i.  e.,  not  by  their 
being  used  to  pay  off  a  debt.  Cash  funds,  as  such,  cannot 
be  considered  as  having  been  invested  until  they  are 
scattered  in  the  general  circulation  and  cease  to  be  "  cash 
funds  available  for  investment",  and  until  they  leave 
the  money  market.  As  such  is  not  the  case  if  they  are 
merely  used  to  pay  a  debt,  the  theory  set  forth  in  Ex- 
planation No.  4  to  account  for  the  disappearance  of  sav- 
ings funds  from  the  money  market  is  not  substantiated.* 

It  is  true  that  at  busy  times  (and  in  fact  at  all  times) 
many  enterprises  are  undertaken  on  credit,  one  individ- 
ual borrowing  the  funds  accumulated  by  another.  It  is 
equally  true  that  some  of  the  debts  thus  incurred  by  in- 
dividuals may  be  cancelled  out  of  savings  made  by  these 
individuals  during  the  subsequent  period  of  depression. 
But  it  is  not  true  that  such  savings  funds  should  be  ab- 
sorbed and  cease  to  be  cash  capital  when  so  applied,  or 
should  thereby  be  withdrawn  from  the  money  market. 
If  nevertheless  they  disappear  from  there,  they  evidently 
find  an  outlet  different  from  the  one  assigned  in  Explana- 
tion No.  4. 

If  the  assumption  were  correct  that  at  times  of  de- 
pression the  people's  savings  are  more  largely  applied 


*  It  may  seem  that  we  should  not  only  consider  the  act  of  pay- 
ing the  debt  but  also  the  question  as  to  what  the  payee  does  with 
the  money  afterwards.  Let  us  take  some  examples.  Suppose  he  uses 
it  for  building  a  house.  If  so,  the  funds  would  find  investment  in 
creating  new  wealth: — while  in  this  chapter  we  are  discussing  the 
question  how  they  can  find  investment  without  the  creation  of  new 
wealth,  the  fact  being  that  at  times  of  depression  (such  as  we  are 
now  considering)  the  opportunities  for  the  creation  of  new  wealth 
are  quite  limited.  Suppose  he  squanders  the  money.  Then  an  in- 
vestment does  not  take  place  at  all,  and  again  we  gain  no  clue  as 
to  how  surplus  earnings  are  invested  in  times  of  depression.  This 
latter  point  is  the  only  one  we  are  considering  in  this  chapter,  and 
in  the  text  above  we  are  specially  considering  the  question  whether 
the  act  of  repaying  a  loan  constitutes  an  investment  of  the  money 
so  paid  over.  We  are  not  discussing  the  broad  question  as  to  what 
may  possibly  be  done  with  the  money  after  it  has  been  used  for  re- 
paying a  loan. 


22  How  Are  Savings  Invested 

toward  paying  off  debts  and  canceling  loans,  this  ten- 
dency should  manifest  itself  in  the  case  of  savings  banks 
and  insurance  companies.  The  loans  they  had  issued  be- 
fore should  be  largely  paid  back  to  them  and  they  should 
be  at  a  loss  as  to  what  to  do  with  their  funds.  As  a 
matter  of  fact,  no  such  tendency  manifests  itself  at  times 
of  depression. 

EXPLANATION  NO.  5.— In  periods  of  great  business 
activity  there  is  more  productive  capital  built  up  than 
can  be  procured  from  the  people's  savings  accruing  at 
the  time ;  the  excess  being  built  up  on  the  strength  of 
funds  supplied  by  credit  institutions,  with  the  result  of 
exhausting  and  unduly  straining  all  credit  facilities  of 
the  community.  The  savings  made  in  the  subsequent  pe- 
riod of  depression  are  needed,  therefore,  for  putting  the 
credit  institutions  on  a  sound  basis  again. 

REPLY. — There  is  some  truth  in  this  statement,  but 
very  little.  As  a  matter  of  fact,  the  credits  issued  by 
our  financial  institutions  are  not  relieved  or  reduced  ma- 
terially in  a  period  of  depression.  During  our  late  de- 
pression of  1893  to  1897  the  credits  issued  by  our  com- 
mercial banks  were  reduced  by  only  135  million  dollars. 
Suppose  that  this  loan  reduction  was  entirely  due  to  the 
savings  made  on  the  part  of  the  borrowers  (though  it 
may  as  well  have  been  due  to  other  causes),  could  this 
small  amount  explain  what  became  of  the  4,000  million 
dollars  of  savings,  which  flowed  into  the  money  market4 
in  the  course  of  those  four  years,  and  whose  outlet  is  left 
unaccounted  for? 

Let  it  be  well  understood  that  we  are  dealing  here 
only  with  such  credit  institutions  as  really  create  credit 
funds,  i.  e.,  the  commercial  banks;  not  with  institutions 
(like  savings  banks)  who  merely  lend  out  funds  that 
were  already  in  existence,  and  who  practically  act  only 
as  mediators  between  the  owner  of  such  funds  on  the  one 


at  Times  of  Depression?  23 

hand  and  the  borrower  on  the  other.  It  is  hardly  the 
latter  class  of  institutions  which  come  in  consideration 
when  speaking  of  over-strained  credit  conditions,  for  the 
extent  of  the  credits  they  grant  is  bound  to  keep  a  close 
proportion  to  the  extent  of  the  funds  entrusted  to  them 
by  the  public.  Not  so  with  the  commercial  banks.  With 
them  the  amount  of  credits  issued  depends  largely  upon 
the  requirements  of  the  market  and  a  strain  may  readily 
take  place  if  they  create  artificial  funds  to  an  extent  near 
the  safety  limit,  either  by  the  issue  of  bank  notes  or  by 
the  extension  of  bank  credits. 

These  artificial  funds  can  be  used  for  the  creation  of 
new  wealth  precisely  the  same  as  funds  accruing  from 
savings.  They  can  be  used  for  that  purpose  only  once,* 
the  same  as  savings  can  be  used  only  once.  Thus,  if  their 
total  volume  increases  from  3  billions  to  4  billions,  the 
increase  of  1  billion  represents  cash  funds  available  for 
building  up  one  billion  dollars'  worth  of  new  productive 
capital,  or  of  new  commercial  capital.  At  busy  times 


*  It  may  seem  as  though  such  "credit  money"  can  be  employed 
over  and  over  again  towards  building  up  new  productive  capital, 
inasmuch  as  it  is  constantly  reverting  to  the  issuers,  and  constantly 
being  reloaned.  But  that  supposition  would  be  wrong.  Most  of  those 
reloaning  transactions  represent  a  mere  shifting  of  borrowings;  a 
contracting  of  new  debts  to  pay  old  ones.  Suppose  a  merchant,  A,  is 
short  of  $50,000  to  conduct  his  business  on  a  cash  basis,  and  that  he 
constantly  has  notes  afloat,  aggregating  that  amount,  to  make  up 
for  the  deficiency.  These  notes,  successively  issued  in  payment  for 
the  goods  he  buys,  and  discounted  in  various  banks,  will  cause  a 
frequent  shifting  of  cash  funds;  but  the  aggregate  of  these  trans- 
actions will  amount  to  the  same  thing  as  a  permanent  loan  of  $50,000 
to  that  merchant,  on  the  part  of  the  banks,  as  though  it  were  a 
permanent  investment  of  the  banks'  credit  money  in  A's  business, 
that  bank  money  having  been  used  by  him  to  build  up  part  of  his 
"circulating  capital."  Now  suppose  A  saves  up  $50,000,  and  pays  all 
his  notes,  issuing  no  more  of  them.  Then  the  banks'  funds  become 
free  to  that  amount,  to  be  lent  out  to  some  other  borrower,  B;  this 
time  for  real  investment  purposes,  i.  e.  for  creating  new  capital  goods. 
But  the  reader  will  readily  perceive  that  the  funds  thus  becoming" 
available  for  investing  purposes  really  consist  of  A's  savings.  Seem- 
ingly the  capital  goods  created  by  both  A  and  B,  aggregating  $100,000, 
have  all  been  built  up  with  credit  money  advanced  by  the  banks;  but 
as  a  matter  of  fact  only  $50,000  came  from  that  source,  the  other 
$50,000  from  the  saving  process.  So  the  issue  of  $50,000  credit  money 
will  only  once  build  up  new  productive  capital  to  that  amount.  Every 
additional  million  dollars  of  bank  notes  or  bank  loans  issued  can  be 
made  available  for  creating  new  wealth  to  the  like  amount,  and  to 
that  extent  only. 


24  How  Are  Savings  Invested 

a  tendency  prevails  towards  a  rapid  increase  of  such 
"credit  money";  at  dull  times,  towards  diminishing  its 
volume.  To  find  out  how  much  its  volume  diminished 
during  our  depression  of  1893  to  1897,  we  have  to  sub- 
tract the  total  volume  existing  at  the  end  of  that  period 
from  the  total  existing  before  the  depression  set  in;  as 
follows : 

Total  credit  money  extant  in  1892:  Bank  notes  $174; 
loans  of  National  Banks  $2171;  of  State  Banks 
$757  millions;  in  all $3,102,000,000 

Total  credit  money  extant  in  1897:  $230;  $2067;  $670 

millions;  in  all.... 2,967,000,000 

Showing   a    decrease    of 135,000,000 

This  small  reduction  of  135  millions*  can,  at  best,  ac- 
count for  the  absorption  of  only  an  equal  amount  of  the 
savings  made  during  that  period;  but  does  not  explain 
what  became  of  the  balance  of  the  savings.  If,  as  as- 
sumed in  the  early  part  of  this  chapter,  the  total  of  the 
savings,  left  unaccounted  for,  amounted  to  1000  millions 
per  annum,  or  4000  millions  for  the  four  years  from  1893 
to  1897,  the  small  share  of  this  total  which  is  represented 
by  the  above-stated  amount  of  135  millions  cuts  no  figure. 


The  importance  of  credit  money,  in  so  far  as  it  con- 
tributes cash  funds  towards  building  up  new  productive 
capital,  seems  to  have  been  much  exaggerated  by  our 
economists.  That  amount  is  quite  small,  when  compared 
with  the  amount  supplied  by  the  saving  process.  Savings 
funds  are  always  flowing  into  the  money  market  quite 
freely;  but  they  soon  find  investment  and  disappear, 
never  to  be  seen  asrain,  while  credit  money  will  constantly 
reappear  in  the  money  market  and  be  lent  out  over  and 


*  The  deposits  in  Trust  Banks  are  not  considered  in  the  above 
statement.  At  that  period  the  Trust  Banks  did  very  little  business 
of  such  character  as  the  commercial  banks  do  (see  footnote,  page 
20  ),  so  their  deposits  could  not,  at  that  time,  be  classed  the  same 
as  deposits  in  commercial  banks  and  did  not  really  constitute  part  of 
the  country's  money  supply. 


at   Times  of  Depression?  25 

over  again-,  a  fact  which  may  impart  the  impression  that 
there  is  more  productive  capital  built  up  with  credit 
money  than  with  savings  funds.  We  should  bear  in  mind, 
however,  that  credit  money  can  be  used  for  that  purpose 
only  once,  and  only  in  proportion  as  its  total  volume  in- 
creases. The  following  figures  will  serve  to  show  the 
extent  of  this  increase,  for  the  years  1890  to  1900 : 

1890:    Total    of   credit    money   then    extant:    Bank    notes 
$186;  loans  of  National  Banks  $1986;  of  State  Banks 

$581    millions;    in    all $2,753,000,000 

1900:    $310;    $2710;    $3030    millions;    in   all 4,050,000,000 

Showing    an    increase    of 1,297,000,000 

Was  the  whole  of  this  latter  amount  available  for 
new  constructions,  or  the  creation  of  new  wealth?  Hardly. 
Part  of  it  was  tied  up  owing  to  the  fact  that  the  banks 
needed  so  much  more  legal  reserve;  another  part  was 
absorbed  by  losing  enterprises,  by  squandering,  by  re- 
pairs, replacements,  etc.  For  the  sake  of  argument  let  us 
assume  that  out  of  the  $1,297,000,000  increase  of  credit 
money  just  stated,  as  much  as  one  billion  was  available 
for  new  constructions,  though  in  reality  it  was  less.  Dur- 
ing the  same  period  of  1890  to  1900  the  country's  wealth 
increased  by  about  23  billions.  Of  this  amount  perhaps 
one-quarter  was  made  up  by  "appreciation  of  value"  (see 
footnote,  page  12),  the  balance,  say  15  billions,  by  the 
creation  of  new  wealth.  Of  the  cash  funds  necessary  to 
create  this  wealth  there  was  one  billion  supplied  by  the 
issue  of  credit  money,  the  balance,  say  14  billlions,  by 
the  saving  process. 

Reviewing  explanation  No.  5  in  the  light  of  these  fig- 
ures, we  find  that  only  a  small  share  of  the  productive 
capital  (in  this  case  one-fifteenth)  is  being  built  up  with 
credit  money;  and  of  this  small  share  only  a  small  part 
is  cancelled  in  a  period  of  depression — only  135  millions 
during  the  said  four  years.  Were  the  reverse  true ;  were 
the  cash  Fin. ids  required  for  new  enterprises  supplied  prin- 


26  How  Are  Savings  Invested 

cipally  by  the  issue  of  credit  money,  and  were  a  large 
proportion  of  this  credit  money  cancelled  by  the  savings 
made  during  a  subsequent  depression,  then  we  could 
argue  that  there  is  an  inherent  necessity  for  a  period  of 
depression  to  follow  a  period  of  strained  credits  and  of 
great  business  activity.  Then,  Explanation  No.  5  would 
stand  substantiated.  But  not  where  all  facts  point  to  the 
contrary.* 

EXPLANATION  NO.  6.— The  surplus  funds  are  to  a 
larger  extent  absorbed  in  "unproductive  consumption," 
which  results  in  an  increase  of  the  demand. 

REPLY. — This  argument  is  met  quite  often  in  modern 
economics.  On  general  principles  it  may  seem  obvious 
that  if  on  the  one  hand  the  surplus  earnings  are  not  ap- 
plied toward  new  constructions  or  the  creation  of  new 
wealth,  and  on  the  other  they  do  not  accumulate  in  the 
money  market,  they  must  be  used,  to  a  greater  extent 
than  usually,  for  the  purpose  of  consumption.  In  fact, 
many  economists  share  in  the  belief  that  if  towards  the 
end  of  a  boom  period  it  appears  that  more  productive 
capital  has  been  built  up  than  the  demand  for  the  time 
being  will  warrant,  and  if  in  consequence  a  tendency 
arises  to  abstain  from  new  constructions,  then  the  sur- 
plus earnings,  finding  only  partial  employment  in  new 
constructions,  are  more  largely  applied  towards  the  sat- 
isfaction of  personal  wants — for  the  purchase  of  luxuries 
and  consumptibles.  And  the  theory  has  it  that  as  a  result 
of  this  increased  purchasing  power,  which  means  an  in- 


*  In  the  foregoing  the  fact  that,  from  1893  to  1897,  an  amount  of 
$135,000,000  of  loans  was  repaid  to  the  financial  institutions,  has  been 
attributed  to  the  assumption  that  this  amount  represented  so  much 
savings,  but,  as  already  stated,  this  reduction  of  the  loan  account* 
may  be  due  to  other  causes;  for  instance,  to  the  shifting  of  loans 
from  the  commercial  banks  to  the  trust  companies,  or  to  the  reduced 
demand  for  accommodation  on  the  part  of  business  men,  conse- 
quent upon  the  lessened  activity  of  trade.  If  so,  there  would  not  re- 
main even  a  nominal  basis  for  Explanation  No.  5. 


at   Times  of  Depression?  27 

creased  demand  for  consumptibles,  and  naturally  an  in- 
creased production  of  the  latter,  the  general  demand  pre- 
vailing in  the  country  will  expand  and  gradually  become 
large  enough  to  fully  employ  the  productive  capital  then 
in  existence,  whereupon  a  demand  for  additional  pro- 
ductive capital  will  spring  up  and  usher  in  a  new  boom 
period. 

According  to  this  theory  the  demand  for  consump- 
tibles is  greater  in  a  depression  period  than  in  a  boom 
period — a  conclusion  which  runs  counter  to  all  experi- 
ence. 

Again,  if  people,  instead  of  accumulating  and  invest- 
ing part  of  their  income,  will  spend  it  in  luxuries  (which 
is  the  gist  of  the  above  theory)  we  cannot  talk  of  "sur- 
plus earnings"  any  more;  the  latter  representing  such 
income  as  is  left  after  providing  not  only  for  the  neces- 
saries of  life  but  also  for  luxuries. 

If  there  is  more  * '  unproductive  consumption ' '  at  times 
of  depression,  and  if  such  unproductive  consumption  will 
afford  opportunities  for  real  investment  of  surplus  earn- 
ings, the  modus  operandi  should  be  explained.  That  has 
not  been  done  so  far.  Explanation  No.  6,  therefore, 
neither  explains  what  becomes  of  surplus  earnings  at 
such  times,  nor  does  it  agree  with  the  facts  when  assum- 
ing that  they  are  employed  towards  increasing  the  de- 
mand for  consumptibles.  Times  of  depression  do  not 
show  an  increase  of  consumption. 

EXPLANATION  NO.  7.— The  surplus  funds  are  ap- 
plied in  a  larger  measure  for  unproductive  public  ex- 
penditures, for  the  building  up  of  what  we  may  call  "un- 
productive capital";  such  as  schools,  works  of  art,  em- 
bellishment of  cities,  sanitary  improvements,  hospitals, 
etc. 

REPLY. — This  assumption  likewise  runs  counter  to  ac- 
tual facts.  In  years  of  depression  the  expenditures  made 


28  How  Are  Savings  Invested 

for  such  purposes  do  not  increase;  on  the  contrary,  they 
decline. 

This  is  still  more  true  of.  private  expenditures  for 
unproductive  purposes,  such  as  the  buying  of  carriages, 
automobiles,  yachts,  palaces,  pictures,  etc.  Nobody  will 
dispute  that  less  money  is  spent  on  such  investments  in 
hard  times,  even  by  the  rich.  Point  No.  7  would  hold 
good  only  if  the  reverse  were  true,  i.  e.,  if  an  increased 
amount  were  spent  at  such  times. 

EXPLANATION  NO.  8.— The  surplus  funds  are  more 
largely  absorbed  by  investments  in  mortgages  and  pub- 
lic securities 

REPLY.— Many  people  think  that  the  mere  purchase 
of  bonds  and  mortgages,  already  issued  and  already  in 
the  market,  constitutes  an  investment.  It  does  so  from 
the  standpoint  of  the  individual  capitalist,  but  not  from 
that  of  the  cash  funds  as  such.  If  A  buys  a  bond  from 
B  for  $1000,  the  purchase  will  no  doubt  constitute  an  in- 
vestment so  far  as  A  personally  is  concerned;  but  the 
money  as  such  does  not  find  investment  by  the  purchase ; 
it  continues  to  be  idle,  investment-seeking  cash  capital, 
only  in  B's  hands  instead  of  A's.  And  it  remains  in  the 
money  market,  now  as  before.  What  B  does  with  the 
money  later  on  has  nothing  to  do  with  our  subject,  and 
in  this  connection  I  refer  to  the  foot-note  on  page  21; 
what  has  been  said  there  will  also  apply  here.  So  we  are 
justified  in  saying  that  the  mere  purchase  of  bonds  or 
mortgages,  where  the  purchase  money  remains  in  the 
shape  of  cash  capital,  does  not  constitute  a  real  and  final 
investment  for  cash  funds,  and  cannot  possibly  form  an 
outlet  for  the  savings  funds  which  keep  on  flowing  into 
the  money  market  and  which  nevertheless  do  not  accumu- 
late there. 

EXPLANATION  NO.  9.— The  surplus  earnings  find 
investment  abroad. 


OF   THE 

UNIVERSITY 

OF 


at   Times  of  Depression?  29 

REPLY. — In  what  shape  do  they  go  abroad?  In  the 
shape  of  money?  Or  of  merchandise?  Or  through  the 
instrumentality  of  foreign  exchange  ? 

Most  people  believe  that  funds  can  be  sent  abroad 
without  the  necessity  of  gold  shipments;  say,  by  bankers' 
drafts ;  i.  e.,  by  a  mere  shifting  of  credits.  But  this  is  not 
so.  Very  few  people  have  a  clear  conception  of  the  func- 
tion of  foreign  exchange,  and  the  less  they  know  about 
it  the  more  are  they  inclined  to  attribute  all  sorts  of 
mysterious  powers  to  its  agency.  A  discussion  of  this 
subject  will  be  found  in  the  footnote  on  page  116. 

As  to  the  migration  of  surplus  earnings  in  the  shape 
of  cash,  statistics  do  not  bear  out  the  idea  that  during 
hard  times  billions  of  money  are  sent  abroad.  This  would 
necessitate  large  remittances  of  gold,  while  as  a  matter 
of  fact  a  country's  net  movement  of  gold  (the  "net" 
being  the  difference  between  a  year's  exports  and  a  year's 
imports)  is  not  seriously  affected  by  a  period  of  depres- 
sion, and  the  balance  may  as  well  appear  on  the  credit 
side  as  on  the  debit  side.  As  a  rule  such  shipments 
of  gold  merely  represent  the  residual  balances  of  foreign 
trade  transactions,  very  seldom  foreign  investments.  And 
invariably  they  are  of  a  rather  limited  extent. 

Nor  do  statistics  bear  out  the  idea  that  in  hard  times 
the  surplus  earnings  go  abroad  in  the  shape  of  merchan- 
dise. This  would  necessitate  a  sudden  enormous  increase 
of  exports  without  a  corresponding  increase  of  imports. 
True,  there*  is  a  reason  why  exports  should  expand  at 
such  times,  inasmuch  as  wages  and  prices  shrink,  and  the 
home  market  thus  becomes  better  fitted  to  meet  foreign 
prices  and  to  enter  into  foreign  competition.  But  such 
an  expansion  of  the  exports  is  a  plant  of  slow  growth 
and  really  depends  upon  commercial  causes  and  market 
conditions,  not  upon  the  intention  of  capitalists  to  invest 
their  funds  abroad.  Under  favorable  market  conditions 


30  How  Are  Savings  Invested 

such  increase  of  exports  takes  place  anyway.  If  it  does, 
and  if  in  consequence  a  country's  foreign  trade  leaves  a 
balance  in  its  favor,  showing  a  surplus  of,  say,  $100,- 
000,000,  then  the  capitalists  of  that  country  may  invest 
this  amount  in  foreign  securities,  instead  of  having  that 
balance  paid  over  in  the  shape  of  cash;  and  there  we 
would  have  a  clear  case  of  investing  capital  "abroad". 
The  rule  is,  however,  that  there  must  first  be  a  favorable 
trade  balance  and  then  there  is  room  for  investing  do- 
mestic funds  in  foreign  securities — a  subject  which  will 
be  more  fully  discussed  on  page  134.  To  assume  that  at 
times  of  depression  capitalists  will  buy  up  large  lots  of 
domestic  goods,  and  send  them  to  foreign  countries,  in 
addition  to  the  usual  movement  of  export  goods — this 
idea  is  not  worth  serious  consideration  and  is  in  no  way 
borne  out  by  statistics. 

We  have  to  conclude,  therefore,  that  at  such  times 
our  idle  surplus  earnings  cannot  find  employment  by 
migrating  abroad. 

EXPLANATION  NO.  10.— In  times  of  depression  the 
saving  power  of  the  community  relaxes,  resulting  in  a 
shrinkage  of  the  volume  of  savings  and  surplus  earnings, 
and  therewith  of  the  funds  which  constantly  flow  into  the 
money  market  to  seek  investment  there.  Thus,  if  on  the 
one  hand  there  are  admittedly  less  opportunities  for  in- 
vestment, there  are,  on  the  other  hand,  less  funds  looking 
for  investment. 

REPLY. — This  view  is  undoubtedly  correct'.  Inasmuch 
as  the  earnings  of  the  people  fall  off,  their  saving  power 
as  well  as  their  aggregate  savings  will  decrease.  But 
that  does  not  do  away  with  the  fact  that  of  the  savings 
still  remaining  only  a  part  is  being  absorbed  by  new  con- 
structions— a  fact  which  economists  will  hardly  dispute. 
To  bring  this  point  out  more  clearly,  let  us  illustrate  it. 
by  the  use  of  figures. 


at  Times  of  Depression?  31 

Let  us  assume  that : 

The  aggregate  surplus  earnings  per  annum  in  prosper- 
ous times  (practically  all  of  them  being  invested  in 
the  creation  of  new  capital  or  wealth)  come  to $3,000,000,000 

At  a  time  of  depression  the  aggregate  annual  surplus 

earnings  shrink  to  2,000,000,000 

Of  which  amount  there  is  invested  in  the  creation  of 

new  wealths,  say 1,000,000,000 

Leaving  a  balance  of  surplus  earnings,  the  mode  of  in- 
vestment of  which  is  not  known,  amounting  to 1,000,000,000 

Whether  the  last-mentioned  figure  should  be  one  bil- 
lion, or  only  half  a  billion,  does  not  matter  much  for  the 
sake  of  our  argument.  Tt  certainly  is  a  large  amount. 
And  the  disappearance  of  this  large  share  of  the  savings 
is  left  unexplained  by  Explanation  No.  10.  The  latter 
only  states  that  the  total  of  the  savings  will  fall  off;  but 
it  does  not  show  what  becomes  of  the  savings  that  are 
still  being  made.  To  show  that,  is  just  the  point  in 
question. 

Explanation  No.  10  would  cover  the  point  only  if  the 
aggregate  savings  could  be  assumed  to  diminish  always 
at  the  same  rate  as  the  opportunities  for  building  up  new 
capital2  diminish;  as  it  were,  that  a  million  dollars  of 
savings  could  be  made  only  if  there  were  opportunities 
for  investing  that  amount  in  the  creation  of  new  wealth, 
and  that  if  there  were  no  opportunities  for  investing  more 
than  half  a  million  in  that  manner,  no  more  than  the 
latter  amount  could  be  saved.  Such  an  assumption,  how- 
ever, could  neither  be  proved  by  theory  nor  substantiated 
by  facts. 


In  the  foregoing  pages  I  have  reviewed  the  various 
explanations  now  extant  purporting  to  show  how  sur- 
plus earnings  are  invested  in  times  of  depression,  and 
I  have  proved  every  one  of  these  explanations  to  be  un- 
tenable. While  it  is  generally  conceded  that  at  such 
times  the  surplus  earnings  do  not  find  investment  in  new 
constructions  (except  to  a  limited  extent)  the  true  man- 


32  How  Are  Savings  Invested 

ner  of  their  investment  has  never  been  revealed.    I  have 
demonstrated  that: 

First. — They  do  not  accumulate  in  the  money  market. 

Second. — They  do  not,  to  a  larger  extent,  go  into  in- 
vestments of  a  temporary  character. 

Third. — They  do  not  assume  the  shape  of  "liquid 
capital. ' ' 

Fourth. — They  do  not  become  absorbed  when  used  for 
paying  debts. 

Fifth. — They  are  absorbed  only  to  a  very  limited  ex- 
tent, if  at  all,  in  augmenting  the  reserves  of  the  credit 
institutions. 

Sixth. — They  are  not  dissipated  in  luxuries,  or  in  a 
greater  satisfaction  of  personal  wants. 

Seventh. — They  are  not,  in  a  larger  measure,  applied 
to  the  creation  of  what  we  might  call  "unproductive 
capital." 

Eighth. — They  do  not  become  absorbed  if  invested  in 
the  mere  purchase  of  mortgages,  securities,  etc. 

Ninth. — They  do  not  go  abroad  to  find  investment 
there. 

Tenth. — The  theory  that  the  aggregate  of  savings 
diminishes  in  the  same  proportion  as  the  opportunities 
diminish  for  investing  them  in  new  constructions  or  in 
the  creation  of  additional  wealth,  cannot  be  substantia- 
ted. 


No  doubt  a  shrinkage  in  the  aggregate  of  savings  or 
surplus  earnings  takes  place,  when  times  of  depression 
set  in.  Nevertheless  it  is  generally  conceded  that  at  such 
times  large  volumes  of  savings  funds  would  still  be  avail- 
able for  new  enterprises  if  there  were  opportunities  for 
profitable  investment  in  that  direction.  These  savings 
funds  keep  on  right  along  flowing  into  the  money  market; 


at  Times  of  Depression?  33 

only  part  of  them  is  absorbed  in  the  creation  of  new 
wealth;  the  balance  disappears;  but  the  nature  of  the 
outlet  still  remains  to  be  discovered.  Where  does  that 
balance  go? 

That  question,  though  seemingly  of  a  purely  academic 
character,  is  of  vast  practical  importance.  If  we  can 
answer  it,  we  may  find  ourselves  in  possession  of  the  key 
to  the  solution  of  the  greatest  problem  of  the  age:  the 
cause  of  depressions. 


CHAPTER    III. 

THE  INVESTMENT  OF  SAVINGS  AT 
TIMES   OF  DEPRESSION. 


EXPLANATION   OF  THE  CHART. 

BEFORE  inquiring  into  the  nature  of  the  peculiar 
class  of  investments  mentioned  in  the  title  of  this 
chapter,  let  us  broadly  define  what  constitutes  an  invest- 
ment as  such,  and  what  changes  cash  funds  have  to 
undergo  before  they  become  invested. 

To  this  end  let  us  conceive  the  country's  money  sup- 
ply to  be  divided  into  two  classes:  " Active  Money"  on 
the  one  hand,  as  represented  by  the  Red  Ring  of  the 
Chart,  and  ' '  Surplus  Funds ' '  on  the  other,  the  latter  con- 
stituting the  "Money  Market,"  the  central  field  of  the 
Chart. 

The  first  class,  Active  Money,  comprises  by  far  the 
greatest  part  of  the  money  wealth,  viz.,  all  that  is  em- 
ployed in  industry  and  trade,  wage  funds,  people's  earn- 
ings so  far  as  intended  to  be  expended  for  consumpt- 
ibles,  and  all  funds  held  by  business  men  for  purposes  of 
regular  current  business.* 

The  second  class,  Surplus  Funds,  comprises  such 
funds  as  are  not  engaged  in  carrying  on  regular  current 
business,  but  are  idle,  and  available  for  investment. 
These  funds  originate  principally  from  the  surplus  earn- 
ings of  the  savers  (represented  in  the  Chart  by  the  red 
savings  lines  10  and  11,  which  build  up  the  central  field) ; 

*  Such  funds  may  be  temporarily  idle;  but  inasmuch  as  the  owner 
cannot  afford  to  invest  them  elsewhere,  and  will  sooner  or  later  need 
them  again  for  his  regular  business,  they  belong  in  the  class  of 
Active  Money,  i.  e.,  in  the  red  ring  of  the  Chart. 


The  Investment  of  Savings   at   Times  of  Depression.  35 

to  a  small  extent  also  from  the  increase  of  artificial 
money  issued  by  the  commercial  banks,  such  as  bank 
notes  and  bank  credits;  which  increase  is  represented  in 
the  Chart  by  the  red-and-black  line  No.  18. 

We    should    keep    this    distinction    between    Surplus 
Funds  (black  central  field)  and  Active  Money  (red  ring) 
well  before  us  in  order  to  answer  the  above-stated  ques-     ^ 
tion  as  to  what  constitutes    an    investment.     The    latter  i  ~  I 
necessitates  the  transformation  of  Surplus  Funds  into 
Active  Money. 

While  the  act  of  saving  generally  withdraws  Active 
Money  from  the  channels  of  industry  and  trade  and 
turns  it  into  the  Money  Market,  the  act  of  investment 
will  turn  it  back  from  the  Money  Market  into  the  chan- 
nels of  industry  and  trade.  In  terms  of  the  Chart:  while 
the  red  savings  lines  emanating  from  the  "  Income  Field " 
transmit  cash  from  the  ring  to  the  centre,  transforming 
it  from  "Active  Money"  into  "Surplus  Funds,"  the 
black  investment  lines  emanating  from  the  central  field 
carry  it  back  from  there  to  the  ring — from  the  unpro- 
ductive circulation  of  the  Money  Market  into  the  pro- 
ductive circulation  of  industry  and  trade.  They  trans- 
form "Surplus  Funds"  into  "Active  Money." 

This  transformation  constitutes  a  vital  condition  of 
an  investment.  Surplus  Funds,  in  order  to  be  invested, 
must  cease  to  be  "funds  available  for  investment." 
Merely  changing  the  ownership  of  such  funds  does  not 
invest  them;  for  instance,  in  buying  a  house.  But  the 
building  of  a  house  does.  A  thousand  dollars,  if  spent  in 
building  or  creating  any  kind  of  property,  will  be  scat- 
tered into  many  hands,  will  generally  be  turned  into  in- 
come for  the  direct  or  indirect  receivers,  and  will  cease 
to  be  cash  capital.  This  scattering  of  the  compact  money 
mass — the  return  of  the  money  into  the  channels  of  in- 
dustry and  trade  for  purposes  of  production  or  consump- 


36  The  Investment  of  Savings 

tion — that  is  what  constitutes  the  essential  feature  of  an 
investment.  Without  this  scattering  of  the  cash  funds  no 
investment  takes  place. 

»*•**.*** 

Of  such  investment  lines  our  Chart  shows  quite  a 
number,  each  one  denoting  a  separate  and  distinct  class 
of  investment.  Of  the  red  savings  lines,  which  emanate 
from  the  "Income  Field,"  the  Chart  shows  only  two. 
" Replacement  Savings "  and  "Net  Savings/'  the  dis- 
tinction between  these  two  classes  being  based  on  the 
manner  of  investment — whether  the  savings  are  avail- 
able for  increasing  the  country's  wealth  and  for  creating 
new  productive  capital,  or  whether  they  are  absorbed  in 
merely  keeping  up  the  standard  of  the  capital  already  in 
existence  and  in  making  up  for  deterioration  and  losses. 
In  other  words,  the  distinction  as  to  whether  they  must 
be  classed  as  Replacement  Savings  or  as  Net  Savings  de- 
pends upon  the  outlet  from  the  Money  Market,  whether 
they  find  it  by  means  of  Lines  12,  13  and  14,  or  by  means 
of  Lines  15,  16  and  17. 

LINE  No.  10  represents  "Replacement  Savings,"  i.  e.,  such 
savings  as  are  absorbed  in  maintaining  the  standard 
and  efficiency  of  existing  capital,  property,  or  wealth. 
The  manner  of  their  absorption  is  shown  by  the  in- 
vestment lines  12,  13  and  14.  Line  No.  12  stands  for 
"Losing  Enterprises,"  where  cash  capital  is  sunk  in 
injudicious  or  fruitless  undertakings;  the  accumula- 
tion of  such  cash  capital  (or  eventually  the  subse- 
quent replacement  of  it)  evidently  absorbing  savings. 
Line  No.  13  stands  for  "squandering";  a  spendthrift 
may  sell  his  house  and  squander  the  proceeds,  while 
the  man  who  supplies  the  money  and  takes  the  house 
for  it,  finds  investment  for  his  savings.  Inasmuch  as 
the  spendthrift  expends  his  money  for  consumptibles, 
he  transforms  "Surplus  Funds,"  the  savings  of 
others,  into  "Purchase  Money."  a  process  which  can 
be  followed  on  the  Chart.  Line  No.  14  stands  for 
"Repairs  and  Renewals,"  such  as  are  necessitated  in 


at  Times  of  Depression.  37 

consequence  of  wear  and  tear,  the  ravages  of  time, 
accidents,  conflagrations,  floods,  storms,  etc. 

It  is  plain  that  out  of  the  total  of  savings  accruing,  a 
certain  part  is  required  to  make  good  the  losses  result- 
ing from  the  causes  enumerated  above;  and  this  part  of 
the  savings  is  represented  separately  in  the  Chart,  by  the 
red  line  No.  10 — Replacement  Savings. 

LINE  No.  11  represents  "Net  Savings'*;  i.  e.,  such  sav-  j  ^ 
ings  as  are  not  absorbed  by  any  of  the  factors  just 
alluded  to,  and  which  are  therefore  available  for  new 
constructions  and  for  the  augmentation  of  wealth. 
The  manner  of  their  absorption  is  shown  by  the  in- 
vestment lines  15A,  15B,  15C,  16  and  17. 

As  will  be  noticed,  Line  No.  11  divides  into  two 
branches,  one  of  them  being  designated  as  "No.  11  B. 
Capitalistic  Savings,"  the  other  as  "No.  11  C,  Excess 
Savings,"  this  distinction  indicating  the  difference  in  the 
final  results  whch  the  savings  lead  to.  The  fact  is  that 
while  all  "Net  Savings,"  as  represented  by  Line  No.  11. 
are  available  for  the  augmentation  of  the  country's 
wealth,  only  a  part  of  them  really  comes  to  be  employed 
for  that  purpose,  which  part  is  represented  by  the  branch 
of  Line  No.  11  designated  as  "Capitalistic  Savings;" 
while  the  other  part,  designated  as  "Excess  Savings,"  is 
not  so  employed.  The  mode  of  investment  of  these  two 
sub-divisions  of  "Net  Savings/'  therefore,  is  quite  dif- 
ferent, which  difference  can  be  traced  in  the  Chart,  as 
follows : 

"CAPITALISTIC"  SAVINGS  (No.  11  B)  are,  as  stated, 
those  which  lead  to  the  creation  of  new  capital2  or  • 
wealth,  finding  their  avenues  of  investment  through 
the  lines  15  A,  15  B,  15  C  and  16.  Line  "15  A  stands 
for  cash  funds  moving  into  mercantile  enterprises, 
increasing  the  "circulating  capital"  by  opening  new 
commercial  establishments  and  extending  old  ones. 
Line  15  B  stands  for  cash  funds  which  are  being  em- 


38  The  Investment  of  Savings 

ployed  in  the  extension  of  transportation  facilities, 
such  as  railroads,  ships,  roads,  canals,  etc.  Line  15  C 
stands  for  cash  funds  in  course  of  conversion  into  new 
productive  enterprises,  especially  manufacturing, 
mining,  and  agriculture;  also  tenement  houses,  etc. 
Line  16  stands  for  cash  funds  being  invested  in  what 
may  be  termed  "non-productive  capital,"  such  as 
hospitals,  public  schools,  municipal  buildings,  parks, 
houses  occupied  by  the  owners,  pictures,  libraries,  etc. 

"EXCESS"  SAYINGS  (Line  11  C)  constitute  that  part 
of  the  "Net  Savings"  which,  though  available  for 
new  enterprises,  or  for  the  creation  of  new  wealth,  do 
not  find  an  outlet  in  that  direction.  Their  avenue  of 
investment  is  represented  in  the  Chart  by  Line  No. 
17,  "Impair  Investments."  Their  peculiar  manner  of 
investment  has  never  been  explained  so  far,  and  will 
be  the  subject  of  the  present  chapter. 

On  the  last  page  of  the  Chart  will  be  found  Diagrams 
1,  2  and  3,  the  purport  of  which  is  fully  covered  by  the 
accompanying  text.  These  diagrams  will  be  referred  to 
in  this  treatise  as  occasion  demands. 

IMPAIR  INVESTMENTS. 

Savings1  generally  flow  to  the  money  market,  where 
they  seek  investment — a  process  which  has  been  illus- 
trated by  the  red  lines  of  our  Chart.  These  savings,  so 
far  as  they  are  not  absorbed  for  "Replacement"  pur- 
poses, are  available  for  the  creation  of  new  capital  or 
wealth.  In  times  of  depression,  however,  this,  their  nat- 
ural field  of  investment,  becomes  quite  limited,  and  will 
no  longer  absorb  all  the  funds  available  for  that  pur- 
pose. Then  a  part  of  these  funds  is  left  over.  The  part 
thus  remaining  has  been  designated  in  the  foregoing 
pages  as  "Excess  Savings." 

These  Excess  Savings  should  be  expected  to  accumu- 
late in  the  money  market;  as  a  matter  of  fact,  however, 
they  do  not.  They  evidently  find  some  outlet  from  there, 


at   Times  of  Depression.  39 

/ 

almost  as  readily  as  if  absorbed  in  new  enterprises.  How 
this  is  done,  nobody  knows.  They  are,  no  doubt,  turned 
into  capital2,  but  a  corresponding  creation  of  new  capi- 
tal does  not  take  place. 

The  explanations  so  far  given  by  our  economists  to 
account  for  this  strange  phenomenon  have  proved  to  be 
untenable — a  conclusion  which  has  been  fully  demon- 
strated in  the  previous  chapter. 


To  present  the  subject  at  issue  in  a  form  more  readily 
understood,  let  us  resort  to  figures,  and  to  this  end  re- 
produce the  equations  given  on  page  13,  which  show 
how  savings  are  affected  and  investments  changed  in 
their  character  by  the  recurring  seasons  of  prosperity 
and  depression.  The  changes  thus  brought  about  can 
also  be  followed  up  in  Diagrams  1  and  2,  which  see. 

MANNER  OF  INVESTING  SAVINGS  AT  A  TIME  OF  PROSPERITY. 

(See  Diagram  1) 

Dollars 
Annual  savings  available  for  the  creation  of  new  capital 

(the   "Net  Savings"   of  the   Chart) 3  billions 

Savings     actually     invested     in     new     constructions     (the 

"Capitalistic    Savings"    of    the    Chart)    nearly 3  billions 

Savings   left  over   (the   "Excess   Savings"    of   the   Chart)..       Nominal 

MANNER    OF   INVESTING   AT   A    TIME    OF   DEPRESSION. 

(See  Diagram  2) 

Dollars 

Annual  savings  available  for  the  creation  of  new  capital 
(Net  Savings),  as  assumed  on  page  13, — the  saving 
power  of  the  people  having  been  cut  down  by  one 
billion,  owing  to  a  diminution  of  income 2  billions 

Of  which  amount  only  a  part  is  actually  invested  in  new 
constructions  (said  part  representing  the  Capitalistic 
Savings),  say  1  billion 

Leaving  an  amount  of  "Excess  Savings,"  the  mode  of  in- 
vestment of  which  is  not  known,  of 1  billion 

Whether  this  last  figure,  representing  the  "Excess 
Savings,"  should  be  exactly  one  billion,  or  a  different 
amount,  does  not  matter.  In  any  event  the  amount  of 
savings  not  invested  in  the  creation  of  new  wealth  is 
quite  large  at  times  of  depression — a  fact  which  econo- 
mists will  hardly  dispute. 


40  The  Investment  of  Savings 

From  the  above  figures,  rough  as  they  are/  a  conclu- 
sion can  be  drawn  which  will  throw  a  peculiar  light  on 
the  mjode  of  investment  of  the  funds  in  question.  Inas- 
much as  the  saving  process  enriches  the  savers,  increas- 
ing their  aggregate  wealth  by  two  billion  dollars,  and 
inasmuch  as  the  aggregate  wealth  of  the  country  as  a 
whole  increases  only  by  one  billion,  the  acquisition  of 
wealth  on  the  part  of  the  savers  must  be  accompanied  by 
impoverishment9  on  the  part  of  other  members  of  the 
community.  In  other  words:  If  Net  Savings  are  not  in- 
vested so  as  to  augment  the  country's  wealth  or  capital, 
and  if  they  find  their  final  investment  in  some  other  way, 
they  will,  though  benefiting  the  saver,  do  so  only  at  the 
expense  of  "others."  The  savers  will  become  richer; 
"others"  poorer. 

To  render  this  point  still  more  clear,  let  us  again  re- 
sort to  figures.  Let  us  assume  the  wealth  of  the  country 
to  amount  to  100  billion  dollars,  of  which  one  half  is 
owned  by  the  savers,  the  other  half  by  non-savers;  and 
let  us  ascertain  how  the  holdings  of  the  latter  class 
(which  class,  by  the  way,  represents  the  great  mass  of 
the  people)  are  affected  by  the  saving  process  in  a  year 
of  prosperity  and  how  they  are  affected  in  a  year  of  de- 
pression. 

CHANGES   OF  WEALTH   IN   A   TEAR   OF   PROSPERITY. 

Dollars 

Jan.  1st.      Property   held   by    the    savers 50  billions 

Property    held    by    the    non-savers 50  billions 

Total    holdings 100  billions 

Dec.  31st.     Total     holdings,     the     saving     process     having 

added  3  billions  of  new  capital 103  billions 

Of   which    amount   the    savers    own 53  billions 

Leaving  for  the  non-savers,  the  same  as  at  the 

beginning   of    the    year 50  billions 

CHANGES    OF    WEALTH    IN    A    YEAR    OF    DEPRESSION. 

Dollars 
Jan.  1st.      Total  holdings,  same  starting  figures  as  above, 

aggregating    100  billions 


at  Times  of  Depression.  41 

Dec.  31st.  Total  holdings — only  one  billion  of  savings,  out 
of  a  total  of  two  billions,  having  been  used 
for  building  up  new  constructions 101  billions 

Of  which  amount  the  savers  own,  having  aug- 
mented their  holdings  by  two  billions 52  billions 

Leaving  for  the  non-savers,  instead  of  50  bil- 
lions as  at  the  beginning  of  the  year,  only. .  49  billions 


Here  the  non-savers,  representing  the  bulk  of  the 
community,  have  become  poorer  by  one  billion  as  a  se- 
quel to  the  fact  that  savings  to  that  amount,  made  by 
others,  failed  to  be  invested  in  the  creation  of  new 
wealth,*  but  were  invested  in  some  other  way.  Granting 
the  fact  that  at  times  of  depression  there  are  more  sav- 
ings made  than  can,  for  the  time  being,  find  investment 
towards  increasing  the  community's  wealth,  it  follows 
with  certainty,  from  the  above  calculation,  that  the  body 
of  non-savei's  must  become  poorer  to  the  full  extent  of 
the  savings  not  so  employed;  i.  e.,  to  the  full  amount  of 
the  "Excess  Savings." 

A  great  deal,  therefore,  depends  upon  the  manner  of 
investment,  as  to  whether  it  leads  to  the  creation  of  new 
wealth,  or  not.  In  the  one  case  the  community  is  bene- 
fited; in  the  other,  a  part  of  it  suffers  a  certain  impov- 
erishment.9 To  distinguish  these  two  kinds  of  invest- 


*  The  above  calculation,  which  forms  the  basis  of  my  saving- 
theory,  will,  in  the  subsequent  parts  of  this  treatise,  be  referred  to 
as  the  "Basic  Calculation." 

To  economists  this  calculation  may,  at  first  sight,  seem  to  be 
erroneous,  and  the  impression  may  prevail  that  if  the  savers  become 
richer  by  2  billions,  the  community  must  also  become  richer  by  that 
much.  That  this  does  not  necessarily  follow,  is  proved,  however,  by 
the  well  known  squandering  process.  The  spendthrift  who  sells  his 
house  and  spends  the  proceeds,  becomes  poorer;  the  saver  who  sup- 
plies him  with  the  money  and  takes  the  house  for  it,  becomes  richer. 
So  the  enrichment  of  the  latter  is  offset  by  the  impoverishment9  of 
somebody  else,  and  is  not  accompanied  by  an  increase  in  the  aggre- 
gate wealth  of  the  community.  The  savings  are  invested,  but  with- 
out the  creation  of  new  capitals. 

Just  so  in  the  case  covered  by  our  calculation:  the  investment  of 
the  one  billion  of  "Excess  Savings"  does  not  augment  the  wealth  of 
the  community,  but  hinges  on  the  acquisition,  by  the  savers  or  their 
representatives,  of  property  already  existing,  in  connection  with  the 
impoverishment  of  its  previous  owner. 

The  causes  of  the  impoverishment 9  are  radically  different,  how- 
ever, in  the  two  cases  here  cited.  It  is  brought  about  by  the  volun- 
tary doings  of  the  individual  in  the  one  instance,  and  in  the  other 
by  general  market  conditions  entirely  beyond  the  individual's  con- 
trol. 


42  The  Investment  of  Savings 

ment,  let  us  designate  the  one  as  "  Capitalistic  (i.  e. 
capital-producing)  Investments/'  linking  with  the 
"Capitalistic  Savings"  spoken  of  on  page  37,  the  other 
as  "Impair  Investments"8 — the  latter  term  having  been 
used  on  page  38,  as  well  as  in  the  Chart.  Of  these  two 
forms  of  investment  the  first  one  is  well  known  to  the 
reader  and  needs  no  discussion;  so  we  may  confine  our- 
selves to  the  investigation  of  the  second,  the  "Impairing 
Form  of  Investment"  (i.  e.,  the  investment  of  Excess 
Savings),  and  above  all  enquire  into  the  nature  of  the 
impoverishment  caused  by  it.  To  this  end  I  shall  take 
up  three  questions  which  naturally  present  themselves  in 
connection  with  the  subject,  viz. : 

1st  Is  the  impoverishment,9  as  evinced  by  the  aforesaid 
"Basic  Calculation,"  merely  a  matter  of  calculation 
based  on  assumed  figures,  or  is  it  proved  by  actual 
facts? 

2d.  If  a  matter  of  fact,  how  is  it  brought  about?  What 
is  the  modus  operandi? 

3rd.  What  has  the  impoverishment9  of  the  community  to 
do  with  the  investment  of  "Excess  Savings"? 

Let  us  take  up  each  of  these  questions  separately. 


QUESTION  NO.  1. — Is  there  much  impoverishment9 
going  on  among  the  people  at  a  time  of  depression? 

There  certainly  is.  In  fact,  that  is  one  of  the  princi- 
pal features  of  a  depression.  Anywhere  and  everywhere 
we  meet  people  who  complain  of  reduced  earnings,  of 
poor  business,  of  their  inability  to  make  both  ends  meet. 
All  over  we  find  men  out  of  employment,  or  working 
only  part  of  the  time,  and  struggling  hard  to  procure 
even  the  most  urgent  necessaries  of  life — business  men 
running  behind,  and  property-owners  being  compelled  to 
encumber  their  holdings.  Wherever  people  do  not  enjoy 
a  fixed  income ;  wherever  their  earnings  depend  upon  the 


at  Times  of  Depression.  43 

course  of  business;  and  wherever  they  do  not  belong  to 
the  favored  few  who  are  well  to  do  and  who  still  can 
save  and  accumulate,  there  we  find  wealth  waning  and 
poverty  spreading. 

The  ''Basic  Calculation,"  therefore,  agrees  with  the 
facts.  And  in  turn,  the  facts  prove  the  correctness  of 
our  calculation— s-at  least  so  far  as  the  underlying  prin- 
ciple is  concerned. 


QUESTION  NO.  2. — How  is  this  impoverishment9 
brought  about  9 

We  can  readily  trace  the  cause  when  considering  the 
fact  that  at  times  of  depression  but  little  new  capital2 
is  being  built  up  and  that  most  of  the  " working  forces"6 
ordinarily  engaged  in  new  constructions  are  thrown  out 
of  employment.  These  "Constructive"  Forces  comprise 
not  only  the  workmen  immediately  concerned,  but  also 
manufacturers,  contractors,  dealers,  the  men  engaged  in 
transportation  and  in  the  production  of  raw  material, 
etc.,  all  of  whom  find  their  income  either  stopped  or  re- 
duced and  accordingly  become  poorer.  Let  us  designate 
these  people  in  their  entirety  as  "Class  C"*. 

As  soon  as  Class  C  commences  to  suffer  from  the  im- 
poverishment process  caused  by  the  lull  in  new  construc- 
tions, a  new  element  of  disturbance,  which  we  will  call 
the  "Multiplying  Principle,"  comes  into  play,  aggravat- 
ing the  harmful  effect.  The  impoverishment  is  not  con- 
fined to  Class  C,  i.  e.  to  the  Constructive  Forces,7  but 
will  spread  further.  The  individuals  constituting  that 
class,  finding  their  income  stopped  or  reduced,  have  to 
reduce  their  expenses  accordingly.  They  will  buy  less  of 

*  The  individual  members  of  class  C,  or  any  other  class,  are  af- 
fected to  a  very  uneven  extent;  the  one  member,  a  workingman,  may 
lose  all  of  his  income;  another  member,  a  merchant,  only  a  small 
part  of  it.  A  merchant  may  be  a  member  of  each  of  a  good  many 
classes. 


44  The  Investment  of  Savings 

commodities  than  before.  In  consequence  of  that,  the 
producers  and  distributers  of  such  commodities  as  class 
C  *had  been  buying,  will  likewise  be  affected,  the  demand 
for  these  goods  falling  off.  "Withal  the  production  of 
these  commodities  will  be  reduced;  and,  as  a  further  se- 
quence, the  earnings  of  the  producers  will  decline.  So 
the  harmful  effect  is  not  limited  to  the  members  of  class 

C,  the  Constructive  Forces,  but  will  extend  further,  mul- 
tiply as  it  were,  and  reach  those  engaged  in  the  produc- 
tion   of    commodities,    i.e.    the    " Commodity    Working 
Forces."7 

To  illustrate  this  matter  by  an  example,  let  us  single 
out  ten  working  men,  forming  part  of  class  C,  and  as- 
sume that,  when  employed,  their  aggregate  earnings 
amount  to  $5,000  per  annum.  They  spend  that  money  in 
the  purchase  of  commodities.  When  these  commodities 
are  produced  anew,  that  money  will  become  income  for 
those  who  are  engaged  in  reproducing  them.  Let  us 
designate  these  producers  (including  the  distributers). 
so  far  as  they  are  directly  affected  by  the  purchases  of 
those  ten  men,  as  "Class  D  "  When  the  members  of  class 

D,  in  turn,  expend  their  earnings,  that  same  money  be- 
comes income  for  class  E,  and  so  on  for  classes  F,  G,  etc.. 
the  succession  of  income  and  expenditure  forming  prac- 
tically an  endless  chain.  Now  cut  off  the  income  of  those 
ten  men  in  class  C,  and  the  whole  chain  will  be  affected. 
The  expenditures  of  class  C  may  be  reduced  from  $5,000 
to  $1,000,*  thus  diminishing  the  income  of  class  D  by 


*  The  members  of  class  C  surely  do  not  reduce  their  expenditures 
to  nothing,  for  they  do  not  exactly  starve  with  their  families  and  are 
not  left  without  food  and  clothing  and  shelter,  but  will  manage,  by 
hook  or  crook,  to  obtain  the  most  urgent  necessaries  of  life.  If  they 
have  an  account  at  the  sevings  bank,  they  will  draw  against  it.  If 
they  have  furniture  which  t~hey  can  spare,  or  other  kind  of  property 
they  can  dispose  of,  they  will  sell  it.  They  will  leave  the  rent  unpaid, 
and  thus  pirate  on  the  landlord;  or  they  may  pirate  on  their  friends, 
by  borrowing  from  them.  Eventually  they  will  appeal  to  the  charity 
of  others.  On  the  whole,  our  assumption  that  if  they  lose  their  reg- 
ular income  of  $5,000,  they  still  will  expend  $1,000,  may  not  be  far 
from  the  truth. 


at  Times  of  Depression.  45 

$4,000;  which  means  a  total  loss  of  income  of  $9,000  to 
the  two  classes  combined.  The  income  of  class  E  may 
decline  to  the  extent  of  $2,000  or  $3,000,  which  brings 
the  total  loss  up  to  $11,000  or  $12,000.  This  total  will 
keep  on  swelling  as  the  harmful  effect  spreads  further. 
True,  for  each  successive  link  of  the  chain  the  loss  be- 
comes smaller,  being  divided  up,  at  the  same  time,  among 
a  greater  number  of  individuals.*  Still,  the  losses  are 
there,  and,  whether  light  or  heavy,  they  are  felt  by  all 
classes  affected,  and  in  their  aggregate  represent  a  much 
larger  amount  than  the  original  loss  of  $5,000  which  be- 
fell class  C.  Here  we  have^an  illustration  of  the  modus 
operandi  of  the  "Multiplying  Principle." 

To  form  an  estimate  of  the  extent  to  which  the  in- 
come of  the  community  at  large  can  be  affected  by  the 
factors  here  discussed,  we  must  recall  the  figures  given 
in  the  early  part  of  this  chapter.  Let  us  retain  the  as- 
sumption that  while  during  the  prosperous  period  of  1907 
the  total  surplus  earnings  of  the  people  amounted  to  3 
billion  dollars  per  annum  and  were  fully  absorbed  in  the 
creation  of  new  wealth,  the  amount  shrank  to  2  billions 
after  the  depression  set  in,  out  of  which  sum  only  1  bil- 
lion is  being  absorbed  in  the  creation  of  new  wealth, 
instead  of  3  billions  as  before.  Then  two-thirds  of  the 
"Constructive  Working  Forces,"7  i.e.  two-thirds  of  the 
individuals  constituting  class  C,  will  be  put  to  idleness, 
and  will  lose  income  to  the  amount  of  2  billion  dollars 
per  annum.  This  loss  of  income  on  the  part  of  class  C 
will  entail  a  loss  of  income  on  the  part  of  class  D,  of 
probably  not  less  than  one  and  a  half  billion.  The  loss 
to  class  E  will  be  less  than  that,  and  still  less  will  be  the 
respective  losses  to  classes  F,  G,  etc.  If  we  put  down 

*  If  class  C  counts  10  members,  class  D  (i.  e.  those  who  are  di- 
rectly affected  by  the  purchases  of  class  C  and  derive  income  there- 
from) may  count  1,000  members;  class  E  (those  who  derive  income 
from  the  purchases  of  class  D)  5,000  members,  class  F  10,000,  and 
so  on. 


46  The  Investment  of  Savings 

another  billion  and  a  half  as  the  aggregate  loss  of  all  the 
other  groups,  a  figure  which  may  not  be  too  high,  the 
grand  total  of  the  annihilation  of  earnings  would  be 
brought  up  to  5  billion  dollars  per  annum  If  we  com- 
pare this  sum  with  the  amount  of  the  aggregate  actual 
earnings,  which  has  been  computed  at  over  20  billions 
per  annum,  we  find  that  one-fourth  of  the  former  income 
of  the  people  may  thus  be  annihilated.  This  would  be 
the  outcome  if  earnings  to  the  amount  of  one  billion  dol- 
lars were  invested  in  the  "Impairing  Form"8;  i.e.,  if 
they  did  not  lead  to  the  creation  of  new  wealth. 

The  above-stated  proportion  of  one-fourth  may  seem 
excessive.  Whether  the  annihilation  of  income  be  put 
down  as  a  fourth,  or  only  as  a  fifth,  or  a  sixth  of  the 
total,  does  not  matter  much.  My  object  is  not  to  estab 
lish  exact  proportions,  but  to  bring  out  the  general  prin- 
ciple and  to  show  that  an  interruption  in  the  process  of 
building  up  new  capital2,  even  a  partial  one,  forms  in 
itself  a  factor  of  disturbance  potent  enough  to  bring 
about,  to  the  full  extent,  those  harmful  effects  which  are 
being  witnessed  in  a  period  of  depression. 

How  widely  the  two  forms  of  investment  will  differ 
in  their  bearing  upon  the  welfare  of  the  commonwealth, 
may  become  apparent  from  the  following  comparison: 

One  billion  dollars  of  savings1,  if  invested 
in  building  up  new  capital2,  will  aug- 
ment the  country's  wealth  by $1,000,000,000 

One  billion  dollars  of  savings,  if  invested 
in  the  * '  Impairing  Form. ' '  will  not  aug- 
ment the  country's  wealth,  but  will, 
according  to  the  figuring  above,  an- 
nihilate the  income  of  the  community 
to  the  extent  of $5,000,000,000 

These  two  modes  of  investment,  the  Capitalistic  and 
the  Impairing — the  one  enriching  the  community,  the 


at  Times  of  Depression.  47 

other  impoverishing  it — may  seem  to  counteract  and  ex- 
clude each  other;  yet  they  are  both  in  action  at  one  and 
the  same  time,  especially  in  periods  of  depression,  and 
go  very  well  together.  There  may  be  a  billion  dollars  in- 
vested in  the  Capitalistic  Form  and  create  new  capital2 
to  that  amount,  at  the  same  time  when  another  billion 
dollars  is  being  invested  in  the  Impairing  Form,  annihi- 
lating income  on  the  part  of  the  people  to  perhaps  five 
times  that  amount. 


QUESTION  NO.  3. — Does  the  impoverishment  of 
the  community  help  the  savers  to  find  investment  for 
their  "  Excess  Savings"? 

It  does.  Excess  Savings  are  invested,  not  in  the  cre- 
ation of  new  capital,  but  in  the  acquisition  of  capital2 
already  existing,  such  as  the  owners  have  to  let  go,  ow- 
ing to  impoverishment;  to  a  large  extent,  also,  by  mak- 
ing loans  on  such  property,  or  loans  to  such  business 
men  as  find  themselves  running  behind. 

As  already  stated,  this  process  of  impoverishment9, 
which  forms  such  a  conspicuous  feature  in  a  depression, 
does  not  confine  itself  to  reducing  workingmen  and  the 
poorer  classes  to  a  state  of  privation;  it  will  also  en- 
croach upon  the  wealthy,  such  as  own  property  which 
they  may  realize  on10  when  they  can  no  longer  defray 
their  expenses  out  of  their  diminishing  income.  This 
process  of  impoverishment,  therefore,  will  manifest  itself 
in  two  distinct  forms:  on  the  one  hand  in  the  shape  of 
privation  on  the  part  of  those  affected,  resulting  in  a 
lowering  of  their  standard  of  life;  on  the  other  hand  in 
the  shape  of  alienation  of  property.10  These  two  forms 
of  impoverishment  should  be  kept  well  apart.  Making  a 
guess  as  to  the  relative  proportion  of  these  two  kinds  of 
hardship,  I  would  say  that  out  of  a  total  loss  of  income 
of  5  billions  due  to  the  depression  and  to  the  lack  of  de- 


48  The  Investment  of  Savings 

m'and,  there  may  be  4  billions  represented  by  privation, 
and  1  billion  by  alienation  of  property.*  It  is  the  latter 
form  of  impoverishment,  the  loss  of  capital  goods,  which 
the  " Basic  Calculation"  refers  to  in  the  early  part  of 
this  chapter,  when  pointing  out  that  a  billion  dollars  of 
savings,  if  invested  in  a  different  way  than  in  the  creation 
of  new  wealth,  would  impoverish  the  non-savers  of  the 
community  to  the  like  amount  of  one  billion.  But  this  loss 
of  capital  goods  to  the  amount  of  one  billion  is  generally 
coupled  with  a  good  deal  of  privation,  which,  if  ex- 
pressed in  money  value,  would  represent  a  much  larger 
amount.  For  instance,  a  man  may  lose  income  to  the 
amount  of  $3,000  and  may,  in  consequence,  alienate  prop- 
erty worth  $1,000,10  the  loss  of  the  remaining  $2,000  be- 
ing met  by  privation. 

Strictly  speaking,  he  would  thus  become  poorer  not 
by  $3,000  but  by  $1,000.  It  is  only  the  latter  figure,  viz.; 
the  amount  represented  by  the  alienation  of  property10, 
which  counts  towards  absorbing  " Excess  Savings."  In 
proportion  as  such  property  is  thrown  upon  the  market. 
Excess  Savings  come  to  be  invested,  generally  through 
the  medium  of  some  financial  institution.  In  the  pur- 
chase of  such  property  practically  all  savings  funds,  so 
far  as  available  for,  but  not  used  in,  the  creation  of  new 
wealth,  find  their  outlet  from  the  money  market  at  times 
of  depression.  When  they  do,  they  are  being  spent  by 
the  receivers  of  the  money  in  defraying  their  living  ex- 
penses, and  in  consequence  they  re-enter  the  channels  of 
trade  and  industry  and  are  transformed  into  goods  again. 
As  soon  as  Excess  Savings,  say  to  the  amount  of  $1,000, 
re-enter  these  channels,  the  harmful  action  caused  by  the 

*  The  above  proportion  of  1  to  5  between  "alienation  of  prop- 
erty"io  on  the  one  hand  and  "loss  of  income"  on  the  other,  is  identi- 
cal with  the  proportion  I  arrived  at  on  page  46  as  obtaining  between 
"Excess  Savings"  and  "loss  of  income."  Excess  Savings  are  equiva- 
lent in  amount  with  the  alienationio  of  property  caused  by  the  in- 
vestment of  such  Excess  Savings,  so  both  of  these  factors  stand  in 
the  same  proportion  to  the  third  factor,  "loss  of  income." 


at  Times  of  Depression.  49 

fact  that  that  individual  block  of  a  thousand  dollars  of 
Excess  Savings  failed  to  be  invested  in  the  creation  of 
new  wealth,  will  come  to  an  end  and  will  not  spread  any 
further. 

Excess  Savings  will  not  return  into  the  channels  of 
trade  qnd  industry  until  an  equivalent  alienation10  of 
property  on  the  part  of  non-savers  has  taken  place, 
$1,000  of  property  against  $1,000  of  savings;  and  the  im- 
poverishment, the  loss  of  income,  forms  the  whip  which 
enforces  that  alienation.  The  sooner  this  alienation  is 
attained,  the  less  need  is  there  for  the  application  of  the 
whip,  and  the  smaller  is  the  harm  brought  upon  the  com- 
munity; on  the  other  hand,  the  harder  people  fight 
against  the  alienation  of  their  property,  and  the  more 
they  meet  the  loss  of  income  by  privation,  the  fiercer  will 
he  the  lash  of  the  whip,  and  the  greater  the  distress.* 
The  more  privation,  the  greater  will  be  the  curtailment 
of  the  demand,  of  consumption,  and  of  production,  and 

*  Let  us  illustrate  the  above  by  an  example.  Suppose  a  merchant 
has  "run  behind"  to  the  amount  of  $1,000  in  a  year  of  depression,  but 
withal  has  not  reduced  his  business  or  household  expenses  any,  mak- 
ing up  for  the  deficiency  by  means  of  a  loan.  Such  a  loan,  as  ex- 
plained before,  counts  the  same  towards  absorbing  Excess  Savings 
as  would  an  equivalent  alienation  of  property.  Here  we  have  a  case 
where  the  loss  of  income  is  not  met  by  privation.  Therefore  the 
merchant's  loss  of  $1,000  entails  no  diminution  of  the  general  demand 
and,  consequently,  no  loss  of  income  to  others.  The  two  factors  in 
question,  "loss  of  income"  on  the  one  hand  and  "alienation  of  prop- 
erty"]^ on  the  other,  are  coupled  right  in  the  same  link  of  the  chain 
and,  in  consequence,  a  multiplication  of  that  loss  of  income  does  not 
take  place.  Now  suppose  the  merchant  acts  differently,  and,  having 
anticipated  a  poor  year,  reduces  his  household  expenses  from  the  be- 
ginning, so  as  to  economize  $1,000  in  that  year.  Then  he  meets  that 
loss  of  income  of  $1,000  by  privation  to  the  like  amount,  not  by 
alienation  of  property  as  assumed  before.  His  economizing  will  re- 
duce the  general  demand  for  commodities  by  $1,000;  therewith  pro- 
duction; and  therewith  the  income  of  others.  Then  the  loss  of  in- 
come sustained  by  these  "others"  will  be  at  least  $1,000  in  addition 
to  his  own  loss;  but  most  likely  those  "others"  will  economize,  too, 
and  if  so,  the  damage  will  spread  from  one  link  of  the  chain  to  the 
other,  and  may  easily  aggregate  $5,000,or  more,  before  the  individuals 
constitiiting  the  various  links  of  the  chain  have,  in  their  entirety, 
sacrificed  property  enough  to  clear  that  amount  of  $1,000,  or  until 
they  have  become  indebted  that  much. 

The  proportion  between  the  two  factors,  "alienation  of  property" 
(equivalent  to  Excess  Savings)  on  the  one  hand  and  "loss  of  income" 
on  the  other,  stands  as  1  to  1  in  the  first  instance,  and  as  1  to  5  in 
the  second — bearing  out  the  statement  made  in  the  text  that,  the 
more  the  shrinkage  of  income  on  the  part  of  individuals  is  met  by 
privation,  the  more  will  that  shrinkage  of  income  multiply  by  spread- 
ing among  other  members  of  the  community. 


50  The  Investment  of  Savings 

therewith  of  income.  That  whip  of  impoverishment  will 
lead  to  both,  privation  as  well  as  alienation  of  property; 
but  it  is  only  the  latter  which  offers  a  bridge  for  Excess 
Savings  to  be  invested  and  which  thereby  makes  the  lat- 
ter return  into  the  channels  of  industry  and  trade.  Until 
they  do  return  into  these  channels,  the  whip  will  remain 
in  action,  impoverishment  will  spread,  and  incomes  will 

shrink. 

******** 

The  conclusion  arrived  at  in  the  foregoing  discussion, 
that  Excess  Savings  meet  their  investment  by  the  mere 
purchase  of  capital  goods  already  existing,  may  seem  to 
come  in  conflict  with  an  assertion  made  in  the  preceding 
chapter.  In  the  reply  to  Explanation  No.  8,  page  28,  I 
stated  that  the  mere  purchase  of  capital  already  exist- 
ing, or  the  mere  loaning  out  of  funds  on  mortgage,  etc.. 
would  simply  shift  the  funds  from  the  possession  of  one 
man  to  that  of  another,  say  from  A  to  B,  but  would  not 
constitute  an  investment  of  the  funds  as  such  the  latter 
remaining  idle,  investment-seeking  cash  capital,  now  as 
"before.  While  this  is  true  where  the  sale  is  consummated 
as  a  matter  of  regular  business,  and  where  B  intends  to 
use  the  money  subsequently  for  business  purposes,  i.  e. 
for  some  enterprise,  the  situation  is  entirely  changed  if, 
as  a  new  factor,  the  impoverishment9  process  comes  into 
play.  If  B  sells  a  bond,  not  for  business  purposes  but 
because  he  needs  the  proceeds  to  defray  his  living  ex- 
penses, then  the  purchase  money  ceases  to  be  cash  capi- 
tal and  leaves  the  money  market  without  going  through 
the  process  of  a  further  investment,  so  that  practically 
the  real  and  final  investment  of  that  cash  capital 
is  formed  by  the  purchase  of  the  bond.  To  emphasize 
this  point,  I  repeat: 

Whenever  capital  goods  are  sold,  and  the  seller  uses  the 
funds  (i.  e.,  the  proceeds)  for  business  purposes,  these 
funds  find  their  real  and  final  investment  when  ap- 


at   Times  of  Depression.  51 

plied  to  such  business  purposes.  The  mere  sale  or 
purchase  of  property  does  not  then  constitute  an  in- 
vestment of  the  funds  as  such. 

Whenever  capital  goods  are  sold,  and  the  seller  expends 
the  proceeds  for  living  expenses,  then  the  purchase 
of  the  property  constitutes  the  real  and  final  invest- 
ment of  the  funds  thus  changing  hands. 

What  is  said  here  of  cash  funds  in  general,  refers 
specifically  to  cash  funds  accruing  from  savings  or  sur- 
plus earnings.  The  latter  may  be  invested  without  a 
creation  of  new  wealth,  simply  by  the  purchase  of  capi- 
tal2 already  existing,  provided  a  concurrent  impoverish- 
ment9 of  the  owners  of  that  capital  takes  place.  Other- 
wise the  transaction  does  not  constitute  an  investment. 

Let  us  illustrate  this  point  still  further  by  an  exam- 
ple. Suppose  a  wage  earner,  H,  loses  his  position  and 
therewith  his  income.  He  owns  a  house,  worth  say  $5,000. 
From  his  friend  A,  a  saver,  he  borrows  some  money 
which  he  uses  for  his  living  expenses;  and  when  through 
with  it  he  borrows  again,  paying  interest  accordingly. 
After  running  his  debt  up  to  $1,000,  he  gives  A  a  mort- 
gage on  the  house;  which  mortgage  is  subsequently  in- 
creased to  $2,000  and  to  $3,000,  in  proportion  as  his  in- 
debtedness grows.  H  may  find  employment  again  after 
that.  But  the  debt  remains,  and  constitutes  a  profitable, 
interest-bearing  investment  for  A's  savings.  Here  we 
have  a  plain  case  showing  how  savings  can  be  employed 
without  the  creation  of  new  capital  goods;  also,  how  the 
impoverishment  of  the  non-savers  actually  forms  the 
basis  of  the  investment,  opening  up,  as  it  were,  a  new 
field  for  investments,  just  at  a  time  when  depression  pre- 
vails and  when  poverty  is  spreading,  and  when  the 
regular  field  of  investment  narrows  down.  The  example 
also  explains  the  mysterious  disappearance  of  the  sav- 
ings funds  from  the  money  market  at  times  of  depres- 
sion :  Had  the  mortgage  been  given  for  business  pur- 


52  The  Investment  of  Savings 

poses,  there  would  be  a  cash  capital  of  $3,000  in  H's 
hands  to  show  for  it;  or,  eventually,  there  would  be  a 
new  construction  of  some  kind  to  show  for  the  cash  cap- 
ital,in  case  II  invested  it.  In  the  case  covered  by  our 
example,  however,  there  will  be  no  available  cash  capital 
of  $3,000  when  H  issues  the  mortgage,  most  of  the  money 
having  already  been  spent  by  him,  and  no  new  property 
having  been  created  with  the  aid  of  it.  The  funds  grad- 
ually disappeared  from  the  money  market  without  lead- 
ing to  any  visible  result — just  as  we  see  it  in  real  life. 

It  is  in  the  acquisition  of  property  which  the  owners 
cannot  hold,  that  Excess  Savings  find  their  final  invest- 
ment; either  directly,  by  outright  purchase,  or  indirect- 
ly, by  acquiring  a  title  to  or  a  Hen  on  such  property,  say  in 
the  shape  of  a  mortgage  or  of  a  common  loan.  The  char- 
acteristic feature  of  the  investment  of  Excess  Savings  is 
the  Change  of  Possession  of  property  (capital  goods)  al- 
ready existing,  in  conjunction  with  the  involuntary  im- 
poverishment of  the  previous  owner.  This  kind  of  in- 
vestment is  going  on,  to  a  small  extent,  even  at  prosper- 
ous times;  but  it  grows  in  extent  as  business  relaxes,  and 
at  times  of  serious  depression  will  actually  be  the  pre- 
dominating form  of  investment. 


Let  us  recapitulate  the  three  queries  raised  in  the 
early  part  of  this  chapter  in  connection  with  the  "Basic 
Calculation"  and  in  connection  with  the  process  of  im- 
poverishment9 which  that  calculation  reveals.  Our  first 
query  was,  whether  such  impoverishment  really  exists, 
at  times  of  depression.  No  economist  will  seriously  at- 
tempt to  deny  that  it  does.  Second  query:  How  is  that 
impoverishment  brought  about?  By  lack  of  employment 
and  lack  of  earnings.  At  times  of  depression  but  little 
in  the  line  of  new  constructions  is  being  built  up,  in  con- 
sequence of  which  fact  the  Constructive  Working 


at   Times  of  Depression.  53 

Forces,7  which  I  designated  as  class  C,  are  largely  put  to 
idleness  and  are  thus  deprived  of  their  earnings.  This 
enforced  idleness  will  spread  further,  reacting  on  the 
"Commodity  Working  Forces"  D,  E,  F,  etc.,  engaged  in 
production  and  trade,  and  will  reduce  their  income  also, 
thus  bringing  about  a  multiplication  of  the  annihilation 
of  income,  aggregating  perhaps  five  times  the  original 
loss  sustained  by  the  forces  C.  This  annihilation  of  in- 
come will,  on  the  one  hand,  lead  to  more  or  less  privation 
on  the  part  of  the  classes  C,  D,  E,  F,  etc. ;  on  the  other 
hand  to  alienation  of  property10  on  the  part  of  the 
wealthy  members  of  these  classes.  Third  query:  Does 
this  annihilation  of  income,  and  the  consequent  impov- 
erishment of  a  large  part  of  the  community,  help  the 
savers  to  find  investment  for  their  surplus  earnings, 
such  as  are  not  absorbed  in  the  creation  of  new  wealth? 
It  does.  This  class  of  surplus  earnings  finds  its  invest- 
ment in  the  purchase  of  property  or  capital  goods  which 
the  owners  are  compelled  to  alienate10  as  a  sequence  of 
that  impoverishment.  Without  the  impoverishment  there 
would  be  no  such  forced  alienation  of  property,  and 
without  the  latter  there  would  not  be  the  opportunities 
for  investing  "Excess  Savings." 


Economists  will  not  dispute  that  now  and  then  the 
impoverishment  of  the  one  individual  will  enable  the 
other  to  invest  his  savings  by  merely  purchasing  prop- 
erty already  existing.  They  may  also  admit  that  such 
cases  occur  more  frequently  in  seasons  of  depression, 
where  incomes  shrink  and  where  the  impoverishment 
process  becomes  more  pronounced.  But  to  admit  that 
this  impoverishment  process  should  go  far  enough  to  ab- 
sorb practically  all  surplus  income  that  is  not  absorbed 
in  the  creation  of  new  wealth;  and  that,  moreover,  the 
impoverishment  should  be  a  matter  of  inherent  necessity 


54      The  Investment  of  Savings  at  Times  of  Depression. 

in  order  to  provide  investment  for  that  class  of  surplus 
income — to  admit  that,  would  be  almost  impossible  for 
our  economists,  unless  they  thoroughly  remodel  the  ac- 
cepted theories  on  the  subject  of  saving.  Still,  it  is  hard 
to  avoid  those  conclusions,  which  coincide  with  the  con- 
clusion arrived  at  in  the  "Basic  Calculation"  given  on 
page  40,  viz. :  if  the  savers  become  richer  and  the  total 
wealth  of  the  community  does  not  increase  to  an  equal 
extent,  the  non-savers  must  become  poorer,  and  either 
must  give  up  property  or  become  indebted,  to  the  full 
amount  of  the  "Excess  Savings. " 


In  the  foregoing  pages  it  has  been  shown  how  a  de- 
ficiency of  the  demand  is  created  in  the  interval  between 
the  act  of  saving  and  the  act  of  investment,  provided  the 
latter  takes  place  in  the  Impairing  Form8 — a  deficiency 
which  is  never  compensated  for  by  the  act  of  investment. 
The  conclusions  arrived  at  may  seem  to  run  counter  to  a 
well-established  axiom  of  modern  economics,  That  the 
shortage  of  the  demand  originally  caused  by  the  act  of 
saving  is  always  compensated  for  by  the  act  of  invest- 
ment, provided  the  savings  funds  finally  come  to  be  ex- 
pended for  goods  or  services  in  the  course  of  such  in- 
vestment. Whether  this  axiom  can  stand  scrutiny  or  not, 
will  be  discussed  in  a  subsequent  chapter.  For  the  pres- 
ent let  us  bear  in  mind  that  much  depends  upon  the 
manner  in  which  the  savings  funds  come  into  the  posses- 
sion of  the  individuals  who  expend  them  for  commodities 
and  thus  turn  them  into  goods  again — whether  in  the 
shape  of  income,  in  payment  for  services  rendered,  or 
whether  over  the  bridge  of  their  own  impoverishment,  in 
the  shape  of  loans,  or  as  the  proceeds  of  property  which 
they  were  compelled  to  alienate  or  realize  on. 


CHAPTER   IV. 

VARIOUS  DEPRESSION  THEORIES. 

• 

IN  the  preceding  chapters  the  cause  of  depressions  has 
been  connected  with  a  relaxation  in  the  process  of 
building  up  new  capital.2  That  such  a  relaxation  actually 
sets  in  concurrently  with  the  beginning  of  a  depression 
is  generally  admitted  by  economists ;  and  it  is  also  under- 
stood that  as  a  consequence  the  working  forces  ordi- 
narily engaged  in  said  process  are  largely  reduced  to 
idleness — also  that  this  forced  idleness  reacts  upon  those 
engaged  in  the  broad  lines  of  production  and  upon  busi- 
ness in  general,  thus  aggravating  the  ill  effects  originally 
caused  by  the  subsidence  of  new  undertakings.  But 
while  this  slackening  of  new  constructions  is  well  known 
to  be  the  immediate  cause  of  depressions,  it  is  also  well 
understood  not  to  be  the  primary  cause,  being  itself  a 
sequence  of  causes  still  more  remote.  The  nature  of  the 
real,  the  primary  cause,  has  been  a  subject  of  much  dis- 
cussion among  economists,  many  theories  being  extant  to 
explain  the  origin  of  that  lull  in  new  constructions.  Let 
us  review  some  of  these  theories. 

DEPRESSION  THEORY  NO.   1. 

(LACK  OF  FUNDS.) 

The  fact  that  a  dearth  of  cash  capital,  when  becoming 
acute,  is  likely  to  engender  a  crisis,  and  will  always  form 
a  conspicuous  feature  of  the  crisis  proper  after  it  once 
sets  in,  has  led  many  economists  to  believe  that  the  de- 
pression following  a  crisis  must  likewise  be  attributed  to 
that  cause,  i.  e.,  to  the  lack  of  funds.  This  view  has  been 
discussed  at  some  length  in  Chapter  I,  where  I  have 


56  Various  Depression  Theories. 

pointed  out  that  though  a  dearth  of  cash  capital  will 
often  engender  a  crisis  and  serve  to  usher  in  the  subse- 
quent depression,  it  can  not  be  the  cause  of  the  con- 
tinuance of  the  latter,  inasmuch  as  we  generally  do  not 
find  a  scarcity  of  cash  capital  after  the  depression  has 
properly  developed  and  passed  the  primary  stage.  The 
obvious  fact  that  some  other  and  more  powerful  element 
must  intervene  to  give  continuity  to  the  depression,  since 
the  primary  factor — the  dearth  of  cash  capital — is  no 
longer  active,  this  fact  should  conclusively  disprove  the 
"lack-of -funds"  theory,  provided  we  are  looking  for  the 
inherent  cause  of  the  depression,  and  not  merely  for  the 
origin  of  the  crisis.  On  the  other  hand,  such  an  array  of 
brilliant  arguments  has  been  brought  forward  in  support 
of  the  lack-of-funds  theory,  arguments  which  may  seem 
largely  to  controvert  my  own  conclusions,  that  I  deem  it 
best  to  take  up  some  of  them  and  expose  their  fallacy. 

Almost  all  of  these  arguments  lose  sight  of  an  import- 
ant point,  namely,  that  productive  capital2  can  not  for- 
ever go  on  increasing.  The  most  natural  explanation  of 
the  cause  of  depressions,  such  as  would  readily  occur  to 
a  business  man,  would  probably  be  this:  "Productive 
capital  can  not  keep  on  growing  forever;  it  can  expand 
only  in  proportion  as  the  demand  for  the  products  of  cap- 
ital expands,  and  this  demand  is  almost  always  lagging 
behind.  The  growth  of  productive  capital,  therefore,  is 
checked  because  the  demand  cannot  follow/' 

This  explanation,  however,  has  not  found  much  favor 
among  economists,  their  views  trending  rather  in  the  op- 
posite direction.  Most  of  them  prefer  to  attribute  the 
check  in  the  formation  of  productive  capital,  not  to  the 
superabundance  of  capital2  already  in  existence,  but  to 
the  shortage  of  liquid  capital  such  as  is  necessary  to  build 
up  still  more  of  it.  Their  chief  arguments  may  be  summed 
up  in  the  following  four  points: 


Various  Depression   Theories.  57 

ARGUMENT  NO.  1.— The  alleged  superabundance  of 
productive  capital  has  existed  in  the  past  pretty  much 
the  same  as  it  does  today.  As  this  superabundance 
heretofore  did  not  hinder  the  growth  of  productive 
capital,  there  is  no  reason  why  it  should  do  so  at  pres- 
ent, or  in  the  future.  Going  by  the  experience  of  the 
past  we  must  conclude  that  in  spite  of  that  super- 
abundance of  productive  capital  there  is  always  room 
for  more. 

ARGUMENT  NO.  2. — The  expansion  of  productive  capi- 
tal is  to  a  certain  extent  self-sustaining.  The  more 
capital  there  is,  the  greater  the  general  demand;  and 
in  turn,  the  more  the  demand  grows,  the  greater  the 
need  of  productive  capital. 

ARGUMENT  NO.  3. — Whenever  the  investment  process 
relaxes,  the  cause  thereof  must  be  due  to  either  one  of 
two  alternatives,  either  to  a  lack  of  opportunities  for 
profitable  investment,  or  to  a  lack  of  savings  funds 
to  be  invested.  Which  of  these  two  causes  is  the  pre- 
dominating one?  If  it  were  the  former,  i.  e.,  if  the 
opportunities  for  investment  were  wanting,  the  sav- 
ings funds  would  accumulate  in  the  money  market  in 
the  shape  of  huge  idle  cash  funds,  which  as  we  know 
is  not  the  case.  The  cause  of  the  relaxation,  there- 
fore, must  be  due  to  the  other  alternative,  i.  e.,  to  the 
lack  of  savings  funds  available  for  investment — a 
conclusion  fully  corroborated  by  the  fact  that  savings 
almost  always  can  find  investment  of  a  reasonably 
profitable  character. 

ARGUMENT  NO.  4. — A  period  of  very  active  business 
and  of  rapid  increase  of  productive  capital  uses  up 
the  savings  funds  faster  than  they  accrue  and  will 
even  draw  heavily  upon  the  resources  of  all  credit 
institutions,  so  much  so  that  towards  the  end  of  such 
a  period  we  find  a  considerable  dearth  of  liquid  capi- 
tal. A  period  of  relaxation,  therefore,  is  bound  to 
follow  in  order  to  replenish  the  stock  of  liquid  capi- 
tal necessary  for  a  subsequent  period  of  expansion  and 
of  new  enterprises. 

Let  us  examine  the  four  arguments  above  given,  to 


58  Various  Depression   Theories. 

see  if  they  can  stand  scrutiny;  and  let  us  take  them  up  in 
reversed  rotation,  the  last  point  first. 

REPLY  TO  ARGUMENT  NO.  4.— The  scarcity  of 
cash  funds,  often  noticed  towards  the  end  of  a  "boom" 
period,  is  due  largely  to  the  fact  that  during  that  period 
prices  and  wages  undergo  a  gradual  rise,  in  consequence 
of  which  more  money  is  needed  for  industry  and  trade. 
If  towards  the  end  of  a  "boom"  period,  a  general  rise 
of,  say,  15  per  cent,  has  been  effected,  the  transaction  of 
the  country's  business  may  call  for  10  to  15  per  cent, 
more  of  the  circulating  medium.  To  procure  the  addi- 
tional cash  thus  needed,  business  men  look  to  the  money 
market,  and  in  consequence  a  larger  part  of  the  savings 
which  constantly  flow  in  and  which  otherwise  would  be 
available  for  new  enterprises,  is  absorbed  for  purposes 
of  regular  business.  Even  without  this  rise  in  prices  or 
wages  there  is  more  of  the  circulating  medium  required 
in  a  time  of  active  business  than  in  a  dull  time.  These 
two  factors,  in  addition  to  the  steady  absorption  of  cash 
funds  for  the  sake  of  launching  new  enterprises,  account 
for  the  scarcity  of  liquid  capital  so  often  noticed  pre- 
vious to  the  setting  in  of  a  crisis.* 

As  to  the  theory  that  a  period  of  relaxation  and  of 
forced  economy  is  necessary  to  replenish  the  stock  of 
liquid  capital  which  would  be  required  for  another 
"boom"  period,  I  refer  to  the  discussions  following  Ex- 
planations Nos.  1,  2,  3,  4  and  5  in  Chapter  II.  In  those 
Explanations  I  have  considered  every  imaginable  form 
in  which  this  replenishing  process  possibly  may  assume 
practical  shape,  and  have  shown  that  all  of  those  Ex- 
planations lose  sight  of  the  enormous  amounts,  running 
into  billions,  which  we  have  to  deal  with  when  trying  to 
explain  what  becomes  of  the  surplus  earnings,  available 

*  A  further  factor  which,  at  times,  contributes  towards  creating 
a  scarcity  of  cash  funds,  will  be  discussed  on  page  161. 


Various  Depression   Theories.  59 

for  investment,  which  accrue  in  the  course  of  several 
years  of  depression.  The  view  most  current  is,  that  such 
funds  lie  over  in  the  shape  of  ''loanable  funds."  Let  us 
fully  understand  the  meaning:  of  this  word  "loanable"; 
it  does  not  mean  funds  "loaned  out"  (for  that  would 
imply  funds  which  have  found  employment),  but  funds 
ready  to  be  employed,  and  in  the  meantime  lying  idle. 
The  adherents  of  this  view  altogether  fail  to  consider  that 
such  loanable  funds  would,  first  of  all,  show  up  in  the 
commercial  banks;  that,  inasmuch  as  they  remain  unem- 
ployed, they  would  rapidly  accumulate  there  to  a  stu- 
pendous amount;  that  each  year  of  sharp  depression, 
such  as  prevailed  in  the  United  States  from  1893  to  1897, 
would  add  hardly  less  than  one  billion  dollars  to  the  idle 
funds  of  the  country,  making  an  aggregate  of  four  bil- 
lions for  the  four  years — while  as  a  matter  of  fact  the 
banks  showed  only  an  insignificant  increase  of  their  loan- 
able funds  at  the  end  of  that  period,  in  1897,  as  com- 
pared with  1892.  .All  of  these  facts,  which  have  been 
fully  discussed  in  Chapter  II,  disprove  the  above  stated 
view  as  to  the  usefulness  of  a  period  of  depression  in 
increasing  the  country's  liquid  capital  or  replenishing 
the  funds  depleted  in  the  preceding  "boom"  period. 

REPLY  TO  ARGUMENT  NO.  3.— The  latter  has  so 
far  been  considered  unanswerable.  It  seems  plausible  to 
infer  that  if  savings  funds  available  for  capitalistic  in- 
vestment, that  is,  for  the  creation  of  new  wealth,  did  not 
find  their  employment  to  that  end,  they  would  accumulate 
in  the  money  market;  and  inasmuch  as  no  such  accu- 
mulation takes  place,  it  has  been  assumed  that  sooner  or 
later  they  really  do  find  investment  in  the  capital-produc- 
ing form.  It  must  be  conceded  that  if  this  latter  form 
were  the  only  one  in  existence  for  investing  such  funds, 
this  argument  would  be  conclusive.  But  it  is  not  the 
only  form.  In  Chapter  III  it  has  been  shown  that  the 


60  Various  Depression  Theories. 

savings  funds  are  dot  confined  to  investment  in  the  Cap- 
italistic Form,  but  often  find  it  in  the  Impairing  Form — 
a  fact  which  completely  upsets  Argument  3. 

REPLY  TO  ARGUMENT  NO.  2.— There  is  some  truth 
in  the  assertion  that  the  growth  of  productive  capital  is 
in  a  certain  way  self-sustaining,  inasmuch  as  this  growth 
is  followed  by  an  enlarged  demand  for  commodities.  But 
that  demand  will  not  grow  in  the  same  proportion  m  If  it 
did,  there  would  not  be  that  universal  excess  of  produc- 
tive capital  above  the  demand  for  it.  This  excess  exists 
in  spite  of  the  fact  that  there  are  times  when  it  seems  to 
disappear  and  when  the  demand  for  commodities  grows 
large  enough  to  keep  the  productive  capital  fairly  well 
employed.  Such  keen  demand  is  not  normal,  but  is  fos- 
tered by  special  circumstances.  It  occurs,  strange  to  say, 
just  at  seasons  wThen  a  rapid  increase  of  productive  cap- 
ital takes  place;  and,  what  is  still  more  strange,  it  is 
caused  by  the  very  act  of  building  up  such  productive 
capital.  By  that  act,  so  long  as  it  lasts,  the  general  de- 
mand is  temporarily  stimulated.  Capitalists  who  are 
building  new  railroads,  factories,  houses,  machinery,  &c., 
become  consumers  for  the  time  being,  inasmuch  as  they 
engage  working  forces  to  a  lar^e  extent  and  thus  in- 
crease the  general  demand ;  when  through  building,  how- 
ever, and  when  about  to  set  their  works  agoing,  they 
become  producers  where  they  were  consumers  and  are 
thus  beginning  to  increase  the  supply  and  to  decrease 
the  demand  A  multitude  of  such  cases  will  result  in  a 
growing  disparity  between  demand  and  supply  and  will 
therewith  re-establish  that  relative  superabundance  of 
productive  capital  which  forms  the  normal  state  of 
affairs. 

Boom  periods,  where  the  demand  almost  equals  the 
supply,  are  always  accompanied  by  a  rapid  increase  of 
productive  capital,  and  are,  in  fact  caused  by  this  rapid 


Various  Depression   Theories.  61 

increase.  Were  this  increase  self -sustaining,  as  assumed 
in  Argument  No.  2;  in  other  words,  were  the  growth  of 
productive  capital  followed  by  a  corresponding  growth 
of  the  demand,  then  there  would  be  no  reason  why  the 
demand,  after  a  while,  should  lag  behind.  The  fact  that 
it  does  lag  shows  conclusively  its  inability  to  keep  pace 
with  the  growing  powers  of  production. 

REPLY  TO  ARGUMENT  NO.  1.- There  are  many 
economists  who  reject  the  idea  that  the  alleged  super- 
abundance of  productive  capital  should  form  a  barrier 
against  the  still  further  growth  of  such  capital.  They 
hold  that  all  arguments  in  that  direction  are  met  by  the 
simple  fact  that  capital2,  in  spite  of  that  barrier,  is  con- 
stantly increasing  and  that  there  is  room  for  the  increase 
— a  point  which  indeed  sounds  plausible  and  unanswer- 
able. In  reality,  however,  this  point  is  no  more  conclusive 
than  would  be  the  assertion  that  our  civil  laws  form  no 
barrier  against  crime,  on  the  plea  that  these  laws  are  con- 
stantly being  trespassed  against.  The  barrier  is  not  an 
absolute  one  in  either  case;  still  it  exists,  and  is  eminently 
effective.  The  superabundance  of  capital2  forms  no 
absolute  barrier  against  its  increase,  but  it  keeps  that  in- 
crease within  narrow  limits,  such  as  are  drawn  by  the 
extent  of  the  demand  for  the  products  of  capital.  If  more 
capital  exists  in  any  special  line  than  necessary  to  meet 
the  demand,  and  if  the  excess  should  surpass  a  certain 
proportion,  say  15  or  20  per  cent.,  that  excess  will  cer- 
tainly put  a  stop  to  the  further  increase  of  capital  in 
that  line,  except  in  sporadic  cases  where  an  enterprising 
capitalist  has,  or  thinks  he  has,  special  advantages  for 
competing. 

Were  that  barrier  not  in  existence,  and  were  the 
growth  of  productive  capital  merely  dependent  upon  the 
supply  of  savings  funds  applicable  to  that  purpose,  cap- 
ital would,  long  before  this,  have  grown  to  an  extent  be- 


62  Various  Depression  Theories. 

yond  all  conception.  An  idea  of  the  rapidity  with  which 
capital  would  expand  under  such  circumstances  may  be 
gained  from  the  following  examples: 

EXAMPLE  NO.  1. — As  is  well  known,  a  penny  loaned 
out  at  the  time  of  Christ  at  a  moderate  rate  of  compound 
interest,  and  accumulating  undisturbed,  would  now  have 
grown  to  an  amount  impossible  to  pay.  If  we"  consider 
that  at  present  there  are  funds  amounting  to  many  billions 
of  dollars  loaned  out  or  invested,  and  growing  on  the  com- 
pound interest  principle,  the  question  arises,  can  these 
funds  keep  on  growing  at  that  ratio  for  am1-  great  length 
of  time?  If  we  consider  furthermore  that  the  elements 
of  insecurity  which  in  past  ages  hampered  the  continued 
accumulation  and  conservation  of  capital  are  being  more 
and  more  eliminated,  and  if  we  consider  that  on  this  ac- 
count the  accumulation  process  goes  on  all  the  more 
rapidly — is  it  not  evident  that  the  accumulation  must 
reach  the  limit  of  the  possible  much  sooner  than  in  the 
case  of  the  penny — and  must  indeed  reach  it  within  a 
comparatively  short  time? 

EXAMPLE  NO.  2. — In  prosperous  years  the  people  of 
the  United  States  save  up  and  turn  into  capital2  about 
one-seventh  of  their  income.  For  the  ten  3^ears  from  1880 
to  1890  the  income  has  been  estimated  at  an  average  of 
14  billions  per  annum,  and  if  we  figure  the  savings  at 
one-seventh  of  this  amount — that  is,  2  billions  annually 
for  ten  years — we  arrive  at  an  aggregate  of  20  billions. 
This  amount  approximates  the  actual  gain  in  wealth 
which,  according-  to  Census  reports,  took  place  in  that 
period,  viz.,  from  43  billions  in  1880  to  65  billions  in 
1890.  For  the  ten  years  from  1890  to  1900,  which  in- 
cluded only  six  years  of  prosperity,  the  increase  has  been 
variously  estimated  at  from  23  to  29  billions,  which  again 
would  represent  a  saving  power  of  about  one-seventh  of 
the  people's  aggregate  income,  figuring  the.  latter  at  20 


Various  Depression  Theories.  63 

billions,  on  the  average.  Could  such  a  rate  of  accumula- 
tion, growing  larger  from  year  to  year,  be  kept  up  for  a 
long  time,  say,  for  centuries  in  succession? 

EXAMPLE  NO.  3.— If  the  people  of  the  United  States 
can,  under  favorable  circumstances,  accumulate  one- 
?eventh  of  their  income,  though  they  are  not  regarded  as 
possessing  much  of  a  propensity  for  saving,  how  much 
larger  ought  to  be  the  savings  and  the  accumulated 
wealth  of  such  thrifty  peoples  as  the  Dutch  and  the 
French !  If  we  figure  only  a  ratio  of  10  per  cent,  of  their 
income  which,  under  favorable  circumstances,  they  could 
put  by,  and  carry  the  calculation  back  for  three  or  four 
centuries,  starting  with  any  sum  half  way  within  the 
limits  of  the  probable  as  representing  the  people's  annual 
income  at  that  time,  the  total  accumulated  wealth  should 
be  many  times  greater  than  it  really  is — especially  so  if 
we  consider  that  the  annual  increase  in  wealth  will  in- 
crease the  people's  income,  and,  in  turn,  the  increased 
income  will  augment  the  people's  saving  power,  and 
therewith  the  annual  accumulation.  In  view  of  this 
reciprocal  action,  all  tending  toward  an  enlargement  of 
the  country's  wealth,  we  would  be  fully  justified  in 
figuring  the  growth  of  the  latter  on  the  compound  inter- 
est principle,  and  if  so,  we  would  find  a  stupendous  dis- 
crepancy between  the  wealth  there  is  and  the  wealth 
there  ought  to  be. 

These  three  examples  should  be  sufficient  to  demon- 
strate the  enormous  cumulative  power  of  the  saving  pro- 
cess— provided  this  cumulative  principle  had  free  scope. 
It  is  well  understood,  however,  that  it  has  not.  But  why 
not?  In  the  case  of  the  penny  referred  to  in  Example  1, 
we  all  know  the  reason — social  and  political  disturbances 
of  the  most  radical  character,  which  made  it  impossible 
for  any  aggregation  of  capital  to  survive.  In  the  case 
of  France  and  Holland  it  may  also  be  held  that  the  dis- 


64  Various  Depression  Theories. 

crepancy  above  mentioned  can  be  fully  accounted  for  by 
wars  and  other  disturbing  influences.  But  the  damage 
from  wars — devastation  of  property,  and  war  expenses, 
sustained  by  Holland  and  France  in  the  course  of  sev- 
eral centuries — would  represent  only  an  insignificant 
proportion  of  that  discrepancy;  and  a  still  smaller  pro- 
portion would  be  represented  by  disturbing  factors  other 
than  war  Excepting  these  temporary  adversities,  the 
extraneous  conditions  should  have  been  favorable  and 
should  have  allowed  a  rapid  accumulation  of  wealth,  in 
proportion  to  the  people's  saving  power.  If  neverthe- 
less that  rapid  accumulation  did  not  materialize  there 
must  have  been  a  hidden  cause  at  work  to  prevent  it — a 
cause  which  despite  the  favorable  extraneous  conditions 
created  unfavorable  inherent  conditions  sufficient  to 
check  the  cumulative  power  and  therewith  the  growth  of 
wealth  and  of  productive  capital.  Just  so  with  the 
United  States.  Its  rapid  rate  of  increase  in  wealth  can 
not  continue  forever.  It  will  be  restrained  by  the  same 
factor  which  has  limited  the  accumulation  process  in  the 
older  countries. 

We  need  not  look  far  to  find  this  factor — it  consists 
of  the  fact  that  ordinarily  the  extent  of  the  productive 
capital  already  in  existence  exceeds  the  demand  therefor, 
thus  curtailing  the  incentive  for  building  up  still  more  of 
it.  This  almost  continuous  superabundance  of  capital, 
which  has  been  a  characteristic  feature  of  past  ages  as 
v/ell  as  of  recent  times,  reduces  the  opportunities  for 
profitable  investment,  and  thereby  forms  a  most  effective 
barrier  against  the  unlimited  creation  of  new  productive 
capital. 

Economists  are  not  generally  inclined  to  consider  this 
natural  barrier  in  the  proper  light,  and  prefer  to  believe 
that  such  a  barrier  either  must  be  an  absolute  one,  or  that 
it  dees  not  exist  at  all.  Many  of  them  seem  to  hold  that 


rations  Depression   Theories.  65 

so  long  as  there  is  a  house  left  to  be  built,  or  any  sort  of 
enterprise  still  to  be  carried  out,  so  long  can  there  be  no 
lack  of  opportunities  for  profitable  investment  of  billions 
of  savings  funds  and,  therefore,  no  barrier.  That  the 
latter  is  only  relative  and  not  absolute  seems  to  have 
escaped  their  attention.  They  are  unaware  of  the  fact 
that  whenever,  on  account  of  this  barrier,  the  oppor- 
tunities for  profitable  investment  in  new  constructions 
become  scarce,  only  a  part  of  the  savings  funds  will  find 
investment  in  that  form — the  balance  simply  being 
diverted  to  the  Impairing  Form,  as  explained  in  Chap- 
ter III. 


Of  the  four  arguments  considered  above,  which  form 
the  chief  support  of  what  we  properly  may  call  the 
"Lack -of -Funds"  theory,  not  one  can  stand  scrutiny. 
The  "boundless  opportunities"  for,  the  expansion  of  pro- 
ductive capital  do  not  exist.  On  the  contrary,  wherever 
opportunities  turn  up  for  safe  and  half-way  profitable 
investment,  there  is,  ordinarily,  no  lack  of  savings  funds 
to  make  use  of  them.  And  though  there  may  be  periods 
\vhere  this  truth  does  not  seem  to  hold  good,  and  where 
the  great  demand  for  new  constructions  creates  a  demand 
for  cash  funds  far  in  excess  of  the  possible  supply — as  has 
recently  been  the  case  in  the  United  States  and  in  Ger- 
many— it  is  well  understood  that  such  exceptional  periods 
will  not  last  and  that  sooner  or  later  the  ordinary  state 
of  affairs,  the  excess  of  productive  capital  over  and  above 
the  demand  for  it,  will  reassert  itself.  As  soon  as  it  does, 
there  is  no  longer  a  scarcity  of  funds  such  as  are  avail- 
able for  new  enterprises. 

While  the  lack-of- funds  theory  will  undoubtedly  ac- 
count for  the  origin  of  most  of  our  crises,  as. set  forth  in 
Chapter  I,  it  will  not  account  for  the  period  of  continued 
depression  which  so  often  follows  the  crisis. 


66  Various  Depression   Theories. 

DEPRESSION  THEORY  NO.  2. 

(EXCESSIVE  PROFITS.) 

This  theory  makes  a  sharp  distinction  between  the 
wealthy  classes  and  the  working  classes,  ascribing  to  the 
latter  the  greater  consumptive  power  and  to  the  former 
the  greater  accumulating  power.  Thus,  for  illustration, 
out  of  an  income  of  $20,000  going  into  the  hands  of  the 
working  classes,  more  than  $19,000  are  likely  to  be  ex- 
pended for  consumptibles  and  less  than  $1,000  to  be  ac- 
cumulated ;  while  out  of  the  same  income,  if  going  into 
the  hands  of  the  wealthy,  only  $10,000  may  be  spent  and 
as  much  as  $10,000  accumulated.  Evidently,  therefore, 
the  larger  the  share  which  out  of  the  people's  total  in- 
come goes  to  the  working  classes,  the  greater  the  demand 
for  consuraptibles ;  and  again,  the  larger  the  share  which 
goes  to  the  wealthy,  the  greater  the  accumulation;  and 
inasmuch  as  the  accumulations  generally  are  turned  into 
productive  capital  (i.  e.,  into  capital  which  produces  com- 
modities), we  also  might  say,  the  greater  the  production 
of  commodities t  A  plentiful  income  on  the  part  of  the 
working  classes  and  of  the  masses,  therefore,  favors  the 
demand,  while  a  plentiful  income  on  the  part  of  the 
wealthy  favors  the  supply.  The  theory  ascribes  the  gen- 
erally existing  disparity  between  demand  and  supply  to 
the  fact  that  the  share  of  income  received  by  the  working 
classes  is  too  small,  that  of  the  wealthy  too  large. 

This  faulty  division,  as  the  theory  has  it,  occasions  no 
disturbance  in  times  of  general  prosperity,  since  at  such 
times  the  deficiency  of  the  demand  on  the  part  of  the 
working  classes  (due  to  the  deficiency  of  their  income) 
is  compensated  for  by  the  increased  demand  emanating 
from  the  wealthy,  the  latter  investing  their  surplus  earn- 
ings in  the  creation  of  new  wealth  and  productive  cap- 
ital, and  therewith  bringing  an  increased  demand  for 


Various  Depression  Theories.  67 

working  forces  into  the  market.  At  such  times,  there- 
fore, the  working  forces  are  well  employed.  After  a 
number  of  years,  however,  the  rapid  creation  of  new  pro- 
ductive capital  will  slacken,  as  the  demand  can  not  fol- 
low, and  then  the  consequences  of  the  above-mentioned 
faulty  division  manifest  themselves  in  the  shape  of  a 
growing  preponderance  of  the  supply,  culminating  in  a 
depression.  •  •*»*•*• 

There  is  much  truth  in  the  foregoing  theory,  and  in 
itself  it  is  not  antagonistic  to  the  true  cause  of  depres- 
sions, such  as  will  be  developed  in  the  next  chapter;  but 
it  does  not  go  far  enough,  and  falls  short  of  discerning 
the  primary  cause.  We  may  conceive  a  state  of  affairs 
where  that  faulty  division  of  income  is  carried  to  ex- 
tremes and  where  the  working  classes  practically  receive 
no  income  at  all,  being  kept  like  slaves,  and  still  busi- 
ness would  prosper  provided  the  wealthy  would  expend 
the  enormous  accessions  to  their  income  either  for  lux- 
uries, or  in  the  steady  expansion  of  new  capital2  and 
wealth.  Evidently,  therefore,  that  faulty  division  of  in- 
come is  not  itf  itself  sufficient  to  cause  a  depression,  but 
some  other  more  potent  factor  must  come  into  play  to 
lead  to  that  result. 

The  theory  acknowledges  the  fact  that  the  faulty 
division  will  do  no  harm  so  long  as  the  funds  accruing 
from  the  savings  and  surplus  earnings  of  the  wealthy  are 
invested  in  the  creation  of  new  productive  capital,  and 
thus  give  employment  to  the  working  forces  engaged  in 
that  line.  But  the  theory  overlooks  the  natural  question. 
If  the  funds,  though  not  applied  towards  new  construc- 
tions, are  invested  in  some  other  way,  why  do  they  not 
give  employment  to  some  other  class  of  working  forces? 
If  in  either  case  the  savings  funds  meet  real  investment, 
such  as  will  cause  them  finally  to  be  dissolved  and  to  be 
paid  over  to  working  men  and  business  men  in  the  pur- 


68  Various  Depression  Theories. 

chase  of  commodities,  why  should  there  be  prosperous 
conditions  and  full  employment  for  the  working  forces 
in  the  one  case  and  unemployment  in  the  other?  If  it  is 
the  different  mode  of  investment  which  entails  the  unem- 
ployment and  the  stagnation  in  trade,  the  matter  should 
be  explained,  for  then  the  cause  of  the  trouble  evidently 
lies  right  here,  not  in  the  faulty  division  of  income. 

As  a  matter  of  fact  the  "Excessive-Profits"  theory 
connects  the  cause  of  depressions  with  the  saving  process, 
holding  that  the  over-abundant  profits  and  income  of  the 
wealthy  stimulate  that  process  to  an  undue  extent  and 
therewith  the  excessive  construction  of  new  productive 
capital — and  in  this  respect  there  is  much  truth  in  the 
theory.  But  it  does  not  show  us  in  what  manner  the 
deleterious  influence  of  the  saving  process  takes  place, 
and  therefore  falls  short  of  discerning  the  direct  and  im- 
mediate cause  of  depressions.  It  loses  sight  of  two  im- 
portant questions;  first:  If,  at  times  of  depression,  the 
savings  funds  do  not  find  investment,  where  are  they, 
since  they  do  not  show  up  in  the  money  market;  and 
again:  If  they  do  find  investment,  why  do  they  not 
give  employment  to  working  forces,  and  why  should  the 
latter  be  so  largely  condemned  to  idleness? 
******** 

There  is  another  version  of  Theory  No.  2;  as  it  were, 
a  modification  of  same,  which  limits  itself  substantially 
to  the  point  that  the  production  of  such  consumptibles  as 
are  used  by  the  working  classes  absorbs  and  employs 
more  working  forces  than  are  required  in  the  produc- 
tion of  such  commodities  as  are  consumed  by  the  wealthy ; 
in  other  words,  that  $1,000  expended  for  the  common 
necessaries  of  life  would  bring  more  working  forces  into 
action  than  $1,000  expended  for  luxuries;  and  that  for 
this  reason  the  faulty  division  of  income  above  referred 
to  works  injuriously.  If  we  thus  limit  the  scope  of  the 


Various  Depression  Theories.  69 

theory,  it  is  still  less  apparent  why  the  said  factor  should 
show  its  ill  effects  only  at  times  of  depression,  or  why  it 
should  lead  to  a  depression  at  one  time  and  not  at  an- 
other. Nor  is  the  very  starting  point  of  this  version  of 
the  theory  correct.  True,  the  manufacture  of  $1,000 
worth  of  luxuries  calls  for  a  smaller  number  of  workers 
than  would  the  production  of  $1,000  worth  of  necessaries; 
but  we  have  to  bear  in  mind  that  the  individuals  produc- 
ing the  luxuries  will,  on  their  part,  when  expending 
their  income,  create  a  demand  for  common  necessaries. 
And  when  adding  the  latter  class  of  demand  to  the  other 
it  is  not  apparent  why  there  should  be  any  deficiency  in 
the  aggregate. 

DEPRESSION  THEORY  NO.  3. 

(DISPROPORTIONS.) 

The  fundamental  part  of  this  theory  hinges  on  dis- 
proportions existing  between  economic  factors;  too  much 
of  the  one,  too  little  of  the  other.  There  may  be  a  dis- 
proportion (1)  between  the  various  lines  of  production; 
(2)  between  the  aggregates  of  city  population  and  country 
population;  C3)  between  the  volume  of  capital  flowing 
into  some  lines  of  business  and  that  flowing  into  other 
lines;  (4)  between  the  income  of  the  wealthy  and  that  of 
the  working  classes;  (5)  between  the  volume  of  produc- 
tive capital  and  the  demand  for  its  products — and  in 
fact  between  many  other  economic  factors  such  as  ought 
to  maintain  due  proportions  to  one  another. 

In  sum  and  substance  Theory  No.  3  ascribes  economic 
disturbances  to  a  lack  of  system  in  productive  activity — 
to  the  absence  of  a  governing  power  controlling  produc- 
tion and  distribution  which  would  cause  the  various  eco- 
nomic factors  to  work  harmoniously  with  each  other. 
****:;:=*#* 

When  examining  the  various  forms  of  disproportion 


70  Various  Depression   Theories. 

enumerated  above,  we  first  ought  to  eliminate  those  given 
under  Nos.  4  and  5 — the  one  having  been  already  treated 
of  under  "Theory  No.  2,"  page  66,  and  the  other  being  so 
closely  related  to  the  main  theme  of  this  treatise  as  not 
to  require  especial  consideration  in  this  place.  As  a  mat- 
ter of  fact.  Theory  No.  3  is  generally  understood  to  con- 
fine itself  chiefly  to  such  factors  as  relate  to  the  broad 
fields  of  production.  Limiting  our  discussion  accord- 
ingly, and  weighing  the  pros  and  cons  as  to  whether  de- 
pressions and  disturbances  can  really  be  traced  to  dis- 
proportions of  this  nature,  the  following  objections  would 
present  themselves: 

OBJECTION  NO.  1.— That  there  is,  in  many  lines  of 
business,  an  excess  of  the  means  of  production  cannot 
be  doubted;  but  is  there  an  excess  of  actual  production? 
Is  not  the  so-called  over-production  becoming  more  and 
more  a  matter  of  the  past,  and  does  not  production  under 
modern  conditions  adjust  itself  very  closely  to  the  de- 
mand? Take,  for  instance,  iron  and  steel,  the  output 
of  which  a  few  years  ago  attained  -enormous  proportions 
in  the  United  States — did  not  the  production  promptly 
decline  with  the  diminution  of  the  demand  in  1903  and 
1904?  ^Was  there,  at  any  time,  a  real  overproduction  in 
this  line,  or  in  any  other  line  of  manufacture,  that  did 
not  speedily  correct  itself?*  If  we  find  a  close  adjust- 
ment of  the  supply  to  the  demand  to  obtain  everywhere, 

*  A  seeming  exception  to  this  rule  may  be  found  in  the  produc- 
tion of  copper  in  the  United  States,  enormous  over-supplies  having 
come  to  light  in  1903  and  again  in  1907.  In  both  instances,  however. 
the  overproduction  was  intentional,  forming  part  of  a  scheme  for 
manipulating  the  stock  market.  While  the  overproduction  went  on, 
an  artificial  scarcity  of  the  metal  was  created  by  means  of  hiding  a 
part  of  the  output  out  of  sight,  the  public  being  made  to  believe  that 
all  of  the  enormous  production  was  quickly  selling  at  excessive 
prices.  On  the  strength  of  this  belief  the  shares  of  the  copper  min- 
ing companies  advanced  to  high  figures  and  were  then  unloaded  by 
the  "insiders"  on  this  inflated  basis.  When  the  truth  became  known. 
and  the  over-supplies  came  to  light,  an  enormous  drop  of  prices 
ensued,  not  only  in  the  metal  but  more  so  in  the  shares,  which  en- 
abled the  insiders  to  buy  their  shares  back  at  half  the  price  they 
had  sold  them  at.  Such  manipulative  overproduction  does  not  dis- 
prove the  rule  stated  in  the  text  above. 


Various  Depression   Theories.  71 

we  evidently  have  no  right  to  assert  that  there  is  too 
much  production  going  on  in  the  one  line  of  business 
and  too  little  in  the  other.  Or  take  as  another  kind  of 
disproportion  the  flocking  of  the  country  people  into  the 
cities — is  not  the  main  reason  for  this  migration  to  be 
found  in  the  fact  that  city  work  pays  better  than  farm 
work?  And  if  so,  does  not  this  migration  rather  tend 
to  correct  a  disproportion  than  to  create  one?  Finally, 
referring  to  the  third  kind  of  disproportions  mentioned 
above,  is  there  much  truth  in  the  oft-repeated  assertion 
that  too  much  cash  capital  is  flowing  into  some  lines  of 
business,  and  too  little  into  others?  Do  not  investors  nat- 
ural Jy  select  such  lines  of  business  as  are  least  overrun, 
and  which  therefore  give  best  promise  of  adequate  re- 
turns? True,  such  a  promise  may  subsequently  fail  of 
fulfillment,  owing  to  a  falling  off  of  the  demand.  For  ex- 
ample, prior  to  1903  much  cash  capital  went  into  the  con- 
struction of  iron  and  steel  plants  in  the  United  States, 
and  when  later  on  the  demand  for  the  product  of  these 
plants  fell  off,  much  was  heard  about  the  expansion  hav- 
ing been  out  of  proportion  to  the  real  requirements.  But 
did  such  disproportion  exist  at  the  time  the  investments 
were  made? 

The  gist  of  Theory  No.  3  is  represented  by  the  assump- 
tion that  a  partial  overproductive  engenders  a  general 
overproduction.  But  if  the  former  does  not  exist,  how 
can  the  general  overproduction  be  ascribed  to  it? 

OBJECTION  NO.  2.— If  we  were  to  believe  that  the 
maintenance  of  proper  proportions  between  the  various 
lines  of  production  insures  prosperous  times  and  a  dis- 
proportion leads  to  the  opposite  result,  we  might  ask  the 
question,  Did  the  business  men  of  the  United  States  ex- 
ercise good  judgment  in  this  direction  all  through  the 
thirteen  years  of  prosperity  from  1880  to  1893,  while  in 
the  subsequent  four  years  of  depression  they  failed  to  do 


72  Various  Depression   Theories. 

likewise?  The  supposition  which  this  question  implies 
is  simply  preposterous,  and  Theory  No.  3  certainly  can- 
not stand  where  it  leads  to  such  conclusions.  As  a  mat- 
ter of  fact,  the  business  men  acted  just  as  intelligently  at 
the  one  period  as  the  other,  and  at  either  time  did  their 
best  to  adjust  their  production  to  the  requirements  of  the 
market. 

True,  there  is  one  line  of  production  that  is  in  a  great 
measure  beyond  control  by  human  foresight,  and  where 
the  annual  output  therefore  may  vary  considerably;  that 
is.  agriculture.  The  products  of  agriculture  represent 
such  a  large  share  of  the  total  production  that  their 
scarcity  or  abundance  should  certainly  affect  the  aggre- 
gate in  the  manner  assumed  in  Theory  No.  3,  were  that 
theory  correct.  As  a  matter  of  fact,  however,  we  find  a 
poor  crop  to  occur  now  and  then  in  a  period  of  pros- 
perity, and  a  good  crop  while  times  are  bad,  but  as  a  rule 
the  general  drift  of  business  is  not  reversed  by  such  oc- 
currences. If  overproduction  in  such  an  important  line 
as  agriculture  fails  to  turn  the  tide,  how  can  we  expect 
such  a  result  from  other  lines,  which  are  on  the  one  hand 
less  important  and  on  the  other  far  more  within  human 
control ? 

OBJECTION  NO.  3.— Obviously  the  principle  of  dis- 
proportion, as  enunciated  in  Theory  No.  3,  could  be  held 
responsible  for  depressions  only  if  it  could  be  proved  to 
lead  to  a  diminution  of  the  general  demand. 

Theory  No.  3  attempts  such  a  proof  on  the  following 
line  of  reasoning:  In  one  or  some  lines  of  business  there 
occurs  an  overproduction,  or  at  least  excessive  competi- 
tion. In  consequence,  prices  in  those  lines  will  fall; 
therewith  the  income  of  the  respective  producers;  and 
therewith  their  purchasing  power.  Owing  to  this  lessen- 
ing of  the  purchasing  power  on  the  part  of  these  individ- 
uals the  producers  in  all  other  lines  of  business  cannot 


Various  Depression  Theories.  73 

sell  them  so  much  as  before;  therefore  these  other  lines 
will  also  suffer,  and  the  partial  overproduction  becomes  a 
general  one. 

Let  us  see  how  far  this  line  of  reasoning  can  stand 
scrutiny.  To  this  end  let  us  select  some  special  trade, 
say,  the  shoe  business,  and  let  us  assume,  for  the  sake 
of  argument,  that  this  industry  embraces  10  per  cent,  of 
all  the  working  forces6  of  the  community.  Let  us  desig- 
nate the  people  so  engaged  as  Group  D ;  the  remaining  90 
per  cent.,  embracing  all  other  lines  of  business,  as  Group 
S.  Suppose  the  first-named  group  be  compelled,  by  sharp 
competition,  to  reduce  the  selling  price  of  shoes  by  20 
per  cent.;  will  the  members  of  the  other  group  (S)  really 
suffer  thereby  and  find  their  purchasing  power  lessened? 

To  investigate  this  question,  let  us  further  assume  the 
purchasing  power  of  the  whole  community  to  be  $1,000 
per  annum,  of  which  $900  comes  from  Group  S  and  $100 
from  Group  D.  Now,  suppose  that  the  break  in  prices 
above  referred  to,  sets  in,  and  that  Group  D  will  subse- 
quently realize  only  $80  for  their  goods  (shoes)  instead 
of  $100  as  before;  which  means  that  the  purchasing 
power  of  Group  D  is  lessened  by  $20.  Evidently  the 
members  of  Group  S  will  now  spend  less  money  for  shoes. 
If  their  expenditures  on  this  account  had  formerly  been 
$90  per  annum,  they  can  now  buy  the  same  goods  for  $72, 
and  have  $18  over,  which  amount  becomes  available  for 
buying  other  kinds  of  commodities,  additional  to  those 
theretofore  purchased  by  that  group.  This  increased 
purchasing  power  on  the  part  of  Group  S  will  give  em- 
ployment to  a  third  group,  T,  to  the  amount  of  $18,  and 
the  latter  group  will  at  once  become  a  purchaser  to  that 
extent  and  will  fully  make  up  for  the  reduced  purchasing- 
power  of  Group  D.  Even  the  seeming  discrepancy  be- 
tween the  surplus  of  $18  coming  to  Group  S  as  against 
the  loss  of  $20  sustained  by  Group  D,  disappears  when 


74  Various  Depression   Theories. 

considering  that  the  members  of  the  latter  g'roup,  who  so 
far  have  been  spending  $10  per  annum  to  buy  what  they 
themselves  needed  in  the  line  of  shoes,  can  now  buy  what 
thpy  need  for  $8,  so  that  their  real  loss  of  purchasing 
power  conies  to  only  $18,  not  $20. 

Now  let  us  figure  the  totals.  Owing  to  excessive  com- 
petition among  those  employed  in  the  shoe  business,  their 
purchasing  power  becomes  reduced  from  $100  to  $82; 
that  of  all  other  classes  rises  from  $900  to  $918;  making 
an  aggregate  of  $1000.  Before  the  sharp  competition  set 
in,  the  aggregate  purchasing  power  amounted  also  to 
$1000.  Where,  then,  does  the  falling  off  of  the  demand 
come  in? 

Thus  when  going  into  details  and  resorting  to  figures, 
we  find  no  substantial  basis  for  the  assertion  that  the 
cheapening  of  some  lines  of  goods,  caused  by  a  partial 
overproduction  or  by  excessive  competition,  in  any  line 
of  industry,,  should  lessen  the  purchasing  power  of  the 
community  as  a  whole,  or  reduce  the  aggregate  of  the  de- 
mand. Just  the  reverse  takes  place — the  cheapening  of 
any  line  of  goods  will  benefit  the  community  ond  increase 
its  purchasing  power — perhaps  not  in  terms  of  money, 
but  certainly  in  the  volume  of  goods  which  the  money 
will  command.  A  &  » 

V         V         V          V          ~;.'          ^          w          ^F 

When  speaking  of  overproduction,  economists  often 
do  not  mean  excessive  production  of  the  commodities  as 
such  (which,  as  stated  before,  is  more  and  more  becoming 
a  matter  of  the  past)  but  an  excess  of  the  means  for 
production.  By  overproduction  in  any  special  line  they 
mostly  mean  an  excess  of  productive  capital  in  that  line. 
And  it  is  the  alleged  disproportion  in  building  up  pro- 
ductive capital,  too  much  in  the  one  branch  of  industry 
and  too  little  in  the  other,  to  which  they  principally 
ascribe  the  derangement  of  business  and  the  resultant 
depression. 


Various  Depression   Theories.  75 

But  a  depression  cannot  take  place  without  a  falling 
eft'  of  the  demand ;  and  why  the  demand  should  suffer 
owing  to  the  said  disproportion,  that  has  never  been 
proved.  Any  attempt  to  establish  such  a  proof  would 
at  once  come  to  naught  when  trying  to  substantiate  it 
by  means  of  figures. 

Suppose  there  be  an  excess  of  cash  funds  invested  in 
the  creation  of  bicycle  plants  and  too  little  in  shoe  fac- 
tories; true,  this  disproportion  will  result  in  a  lessened 
demand  for  working  forces  so  far  as  the  building  of 
shoe  factories  is  concerned,  but  will  not  this  be  fully 
compensated  for  by  the  increased  demand  arising  from 
the  building  up  of  the  bicycle  plants?  And  if  the  said  dis- 
proportion will  not  reduce  the  demand  while  building 
the  factories,  have  we  more  reason  to  believe  that  it  will 
do  so  later  on,  when  operating  them?  It  might  be 
held  that  while  part  of  the  bicycle  plants  would  stand 
idle  for  lack  of  work,  there  would  not  be  shoe  factories 
enough  to  meet  the  demand  for  shoes,  and  to  give  em- 
ployment to  the  hands  required  to  supply  this  demand. 
But  if  such  were  the  case,  we  should  expect  to  see  on  the 
one  hand  a  sharp  rise  in  the  price  of  shoes  and  on  the 
other  hand  a  lack  of  cash  funds  available  for  building  up 
new  factories  in  this  line — while  as  a  matter  of  fact  we 
find  neither  the  one  nor  the  other,  in  any  line  of  business, 
except  under  unusual  circumstances.  Where  are  those 
lines  of  industry  which  offer  opportunities  for  safe  and 
paying  investment  at  times  of  depression,  and  for  which 
the  fundc  to  make  use  of  such  opportunities  cannot  be 
obtained? 

Here  we  encounter  the  vulnerable  point  of  the  theory 
that  too  much  cash  capital  goes  into  the  one  line  of  busi- 
ness and  too  little  in  the  other.  Were  this  assumption 
true,  the  neglected  line  should  be  noted  for  high  prices 
and  scarcity  of  supply,  as  the  only  possible  result  of  that 


76  Various   Depression   Theories. 

disproportion.  The  adherents  of  said  theory,  however, 
argue  the  other  way,  and  contend  that  the  lack  of  invest- 
ment funds  going  into  the  neglected  line,  and  the  conse- 
quent restriction  of  the  means  of  production,  would  re- 
sult, not  in  high  prices  and  scarcity  of  the  supply  but  in 
overproduction  and  low  prices — a  paradoxical  conclu- 
sion, to  say  the  least. 


Out  of  the  great  number  of  theories  which  econo- 
mists have  brought  forth  to  explain  the  cause  of  depres- 
sions, I  have,  in  the  foregoing  pages,  been  discussing  the 
three  which  count  the  greatest  number  of  adherents.  All 
these  theories  ascribe  the  depression  to  the  relaxation 
of  new  constructions,  differing,  however,  as  to  the  causes 
of  this  relaxation;  the  one  theory  assigning  it  to  a  lack 
of  the  funds  necessary  to  keep  up  the  rapid  expansion  of 
productive  capital,  such  as  took  place  in  the  preceding 
"boom"  period:  the  other  assigning  the  relaxation  to  the 
excessive  income  of  the  wealthy  classes,  which  is  thought 
to  lead  to  an  excessive  construction  of  new  productive 
capital  and  to  an  undue  stimulation  of  the  supply,  so 
much  so  that  in  course  of  time  the  demand  can  no 
longer  keep  pace  with  the  supply;  the  third  theory  as- 
signing the  relaxation  to  a  disproportion  between  the 
economic  factors  that  should  maintain  an  equilibrium  in 
order  to  avoid  overproduction.  But  while  each  one  of 
these  theories  regards  the  lull  in  new  constructions  as 
being  an  indispensable  prerequisite  for  the  setting  in  of 
the  depression,  this  lull,  as  will  be  shown  later  on,  is 
neither  the  direct  and  immediate  cause  of  it,  nor  indeed 
an  indispensable  prerequisite.  I  repeat  that  if  we  recog- 
nize the  true  cause  of  depressions  and  find  the  means 
of  removing  it,  the  process  of  new  constructions  might 
practically  come  to  a  standstill,  and  yet  business  would 
prosper. 


CHAPTER    V. 

THE  "NEGLECTED    POINT"  AS  THE 
TRUE  CAUSE  OF  DEPRESSIONS. 

IN  Chapter  3  it  has  been  shown  that  savings,  such  as  are 
available  for  investment,  will,  in  times  of  depression, 
find  investment  in  the  Capitalistic  (capital-producing) 
Form  only  to  a  limited  extent,  the  balance  finding  it  in 
the  Impairing  Form.  It  has  also  been  shown  that,  if  they 
are  so  invested,  a  diminution  of  the  demand,  with  all  its 
ill  effects,  is  the  inevitable  result. 

Now  I  wish  to  emphasize  that  when  speaking  of  the 
*' Impairing  Form  of  Investment"  this  term  should  not 
be  understood  as  attributing  these  ill  effects  to  the  in- 
vestment as  such,  the  act  of  investing  being  invariably 
beneficent,  from  an  economic  standpoint,  inasmuch  as  it 
restores  the  savings  funds  to  the  channels  of  industry  and 
trade,  thereby  preventing  the  hoarding  of  funds  and  the 
strain  resulting  therefrom  which  would  otherwise  be  en- 
tailed by  the  saving  process. 

Seemingly  there  is  a  contradiction  in  the  two  fore- 
going paragraphs,  one  of  them  stating  that  the  invest- 
ment, if  made  in  the  Impairing  Form,  means  a  diminu- 
tion of  the  demand;  the  other,  that  the  investment  as 
such  will  not  lead  to  a  diminution  of  the  demand.  Some 
lifirht  may  be  thrown  on  this  seeming  contradiction,  how- 
ever, if  we  bear  in  mind  that  the  act  of  investing  is  a  se- 
quence of  the  act  of  saving,  these  two  acts  being  often 
considered  as  mere  phases  of  the  accumulation  process. 
Can  the  disturbing  element,  if  not  due  to  the  invest- 
ment process,  be  charged  to  the  saving  process? 

Is  it  possible  that  the  saving  activity  as  such  can 


78  The  "Neglected  Point"  as  the 

exercise  any  injurious  influence  in  the  direction  of  cur- 
tailing the  demand — that  is,  the  demand  for  working 
forces J? 

All  economists  agree  that  it  can.  In  its  primary  stage 
the  saving  process  is  always  accompanied  by  an  injuri- 
c-us  tendency,  inasmuch  as  the  saver  is  constantly  trying 
to  buy  less  from  the  community  in  the  line  of  goods  or 
services  than  he  sells  to  it,  and  thus  is  disturbing  the 
equilibrium  of  supply  and  demand.  This  equilibrium  is 
restored  only  by  the  investment.  It  is  understood  that  by 
means  of  the  investment  the  demand  for  goods  or  services 
— i.  e.,  for  working  forces6 — will  reappear  in  the  market. 
Thus,  if  somebody  saves  $1,000  he  will  first  create  what 
we  might  call  a  "minus  of  demand"  to  the  extent  of 
$1,000.  But  whenever  he  invests  his  savings,  say,  in 
building  a  house,  the  money  is  spent  for  labor,  for  pro- 
duction of  the  necessary  material,  supervision,  etc. ;  so 
he  transforms  the  $1,000  into  wages  and  profits,  i.  e., 
into  income  for  others,  and  in  doing  so  he  employs  work- 
ing forces  and  creates  a  demand  for  them  fully  sufficient 
to  couterbalance  the  minus  of  demand  referred  to  above. 

But  while  this  restoration  of  the  equilibrium  between 
supply  and  demand  will  undoubtedly  take  place  under 
the  Capitalistic  Form  of  investment,  that  is,  where  new 
constructions  of  some  kind  are  being  created,  will  it  also 
take  place  under  the  Impairing  Form,  where,  as  we  have 
seen  in  Chapter  3,  the  act  of  investment  will  not  call  for 
working  forces?  Will  the  minus  of  demand,  and  the 
consequent  unemployment,  as  originally  caused  by  the 
act  of  saving,  be  wiped  out  by  the  act  of  investment, 
where  the  latter  brings  no  demand  for  working  forces 
with  it?  Certainly  not.  Under  such  circumstances  the 
injurious  tendency  connected  with  the  primary  stage  of 
the  saving  process  is  no  longer  counterbalanced,  and  if 
not  counterbalanced  it  will  go  into  effect.  This  being  the 


True  Cause  of  Depressions.  79 

case,  it  must  be  the  saving  activity,  not  the  investment, 
to  which  are  due  the  harmful  results  that  follow.  The 
mode  of  investment  merely  determines  whether  those 
harmful  tendencies  inherent  in  the  saving  process  become 
operative  or  not.  They  certainly  will  become  operative 
whenever  they  are  no  longer  counteracted  by  the  invest- 
ment, i.  e.,  whenever  the  latter  assumes  the  Impairing 
Form. 

To  recall  to  our  mind  the  modus  operandi  of  that 
peculiar  form  of  investment,  let  us  repeat  its  salient 
points,  as  developed  in  Chapter  3. 

Whenever  the  Impairing  Form  of  Investment  prevails, 
as  is  the  case  in  times  of  depression,  the  savers  do  not 
apply  their  funds  in  such  a  way  as  to  turn  them  into  in- 
come for  those  whom  the  funds  go  to.  They  do  not  buy 
personal  services  with  the  money,  nor  goods  for  consump- 
tion, because  that  would  be  spending  the  money,  whereas 
they  mean  to  save  it;  nor  do  they  (or  others  for  them) 
invest  it  in  building  up  new  productive  capital,  because 
new  enterprises  rarely  pay  in  times  of  depression.  They 
need  not  do  either,  and  still  they  can  invest  their  funds; 
the  opportunities  for  doing  so  turning  up  in  a  rather 
roundabout  way.  Inasmuch  as  they  abstain  from  going 
into  new  constructions,  the  group  of  working  forces6  or- 
dinarily employed  in  such  constructions  is  reduced  to 
idleness.  The  income  of  these  working  forces  diminishes 
accordingly.  The  loss  of  income  means  a  lessening  of 
their  purchasing  power;  this,  a  slackening  of  the  demand 
for  commodities;  this  again,  a  curtailment  of  thepro- 
ductionv?  such  commodities  and  a  lack  of  employment 
for  the  producers  and  distributors  of  same.  Thus  the  en- 
forced idleness  of  the  first-mentioned  group  of  working 
forces,  the  1 1  Constructive  Forces, ' '  will  react  upon  another 
group,  in  the  line  of  the  "Commodity  Working  Forces7, " 
reducing  them  to  idleness  also  (at  least  to  some  extent), 


80  The  <: Neglected  Point"  as  the 

and  this  process  of  action  and  reaction  will  spread  from 
the  second  group  to  the  third,  from  there  to  the  fourth,  to 
the  fifth,  and  so  on,  bringing  with  it  in  every  instance  a 
diminution  of  the  demand  and  a  corresponding  annihila- 
tion of  income,  and  thus  causing  a  considerable  multipli- 
cation of  the  ill  effects  and  of  the  unemployment  sus- 
tained by  the  first  group.  The  loss  of  income  of,  say, 
$1.000  on  the  part  of  the  first  group  may,  by  reason  of 
this  "Multiplying  Principle",  be  augmented  to  a  total 
loss  of  income  of  perhaps  $3,000,  or  $4,000  or  $5,000 
(varying  according  to  circumstances),  distributed  among 
many  groups  of  individuals. 

These  groups  are  composed  not  only  of  working  men 
but  also  include  business  men,  many  of  whom  find  their 
trade  and  their  income  more  or  less  curtailed,  and  in 
consequence  are  "running  behind"  where  they  used  to 
make  a  profit.  To  meet  their  expenses,  they  find  them- 
selves compelled  to  borrow,  or  to  realize  on  their  prop- 
erty. When  they  do,  the  funds  of  the  savers  come  into 
action,  either  by  supplying  the  money  needed  to  make  the 
loans,  or  purchasing  property  such  as  the  impoverishing* 
owners  can  not  hold. 

It  is  in  this  manner  that  "Excess"  Savings,  (see  page 
38)  the  kind  of  savings  characteristic  of  times  of  depres- 
sion, are  invested.  The  savers,  or  those  acting  for  them, 
will  not  employ  their  funds  so  as  to  create  new  wealth 
or  productive  capital,  but  will  simply  confine  themselves 
to  buying  capital  goods  (fixed  property,  securities,  etc.) 
already  in  existence.  The  savings  funds  re-enter  the  gen- 
eral circulation  of  industry  and  trade  not  by  the  act  of 
investment,  but  by  the  expenditures  of  the  impoverishing9 
borrowers  and  sellers,  who  expend  the  money  to  meet  their 
living  expenses  or  their  losses  in  business.  No  working 
forces,  therefore,  will  be  called  into  action,  by  the  act  of 
investment,  under  such  circumstances.  And  if  so,  the 


True  Cause  of  Depressions.  81 

original  minus  of  demand,  caused  by  the  act  of  sav- 
ing, is  not  compensated  for  by  the  act  of  investment.* 


All  economists  agree  that  the  saving  activity  will  cause 
a  minus  of  demand  unless  this  minus  be  counterbalanced 
by  the  act  of  investment.  And  inasmuch  as  practically 
all  savings  funds  are  invested  (otherwise  they  would  ac- 
cumulate in  the  money  market)  the  economists  concluded 
that  such  counteraction  always  does  take  place,  no  mat- 
ter what  the  particular  form  of  investment.  We  have 
shown,  however,  that  this  is  the  case  only  if  the  savings 
are  invested  in  the  Capitalistic  Form,  not  if  in  the  Im- 
pairing Form.  The  latter  form  will,  quite  automatically, 
become  operative  as  soon  as  the  opportunities  for  Capital- 
istic Investment  grow  scarce.  Whenever  they  do,  the 
saving  process  changes  its  'character.  Its  inherent  per- 
nicious  tendency  will  no  longer  be  checked,  and  the  sav- 
ers' everlasting  endeavors  to  increase  the  supply  and  re- 
duce  the  demand  will  no  longer  be  restrained  from 
becoming  effective — resulting  in  that  disparity  between 
demand  and  supply  which  we  call  depression. 

Here  we  encounter  the  factor  which  introduces  the 
minus  of  demand  into  our  business  organization  as  a  posi- 
tive, definite  and  unmistakable  element — the  long-sought- 
for  cause  of  the  chronic  disparity  between  demand  and 
supply,  and  the  true  cause  of  depressions. 

##*=#*:#### 

I  have  so  far,  in  this  treatise,  spoken  of  the  "Impair- 
ing Form  of  Investment";  more  properly  it  should  be 
called  the  "Impairing  Form  of  Saving."  Though  the 
manner  of  investment  decides  whether  any  harmful  con- 
sequences take  place  or  not,  we  should  not  lose  sight  of 

*  Further  argument  on  this  point  will  be  found  in  Chapter  6, 
especially  on  pages  92,  96  and  118. 


82  The  "Neglected  Point"  as  the 

the  fact  that  the  source  of  the  harmful  tendency  is  to  be 
found  not  in  the  investment  but  in  the  saving  process. 
If  the  latter  process  could  be  brought  under  control,  and, 
at  times  of  depression,  could  be  so  circumscribed  that 
Excess  Savings—  more  properly  called  "Impair  Savings" 
— would  become  impossible,  i.  e.,  that  no  savings  could 
be  made  except  such  as  can  find  investment  either  for 
Replacement  purposes,  (see  page  36)  or  in  the  Capitalistic 
Form — in  other  words,  if  people  could  be  compelled  to 
expend  for  luxuries  such  part  of  their  surplus  income  as 
could  not  find  investment  in  the  two  ways  just  men- 
tioned, the  depression  would  at  once  be  brought  to  an 
end.  There  would  not  then  be  an  excess  of  working 
forces,  since  they  would  be  absorbed  in  the  production 
of  luxuries  (see  page  108),  so  far  as  not  employed  in  new 
constructions  or  for  purposes  of  Replacement.  Given  the 
possibility  of  checking  or  controlling  the  people's  saving 
activity  so  as  to  prevent  the  formation  of  "Impair  Sav- 
ings," a  relaxation  in  new  constructions,  in  fact  their 
complete  suspension^  might  take  place,  and  still  business 
would  prosper,  for  there  would  be  no  disparity  between 
the  aggregate  demand  (for  working  forces)  and  the  ag- 
gregate supply. 

If,  then,  the  suspension  of  new  constructions  does  not 
necessarily  lead  to  a  depression,  while  the  saving  pro- 
cess, in  its  Impairing  Form,  most  positively  does  so,  it 
follows  that  the  latter  factor  is  the  more  powerful,  the 
deciding  one.  As  a  matter  of  fact,  this  factor  constitutes 
the  ruling  feature  of  all  depressions. 

********* 

A  billion  dollars  of  savings,  applicable  to  the  creation 
of  new  capital  or  wealth,  but  not  so  applied,  can  not  find 
investment  unless  the  non-savers  of  the  community  either 
become  indebted  or  alienate  property  to  the  amount  of  a 
billion  dollars.  In  Chapter  III  I  have  shown  what  factors 


True  Cause  of  Depressions.  83 

come  into  play  to  compel  the  non-savers  to  part  with 
their  property  or  to  run  into  debts — namely,  falling  off 
of  the  demand,  unemployment,  lack  of  income,  and  con- 
sequent impoverishment — all  of  these  factors  being 
brought  into  existence  by  the  same  primary  factor:  Im- 
pair Savings. 

Thus  a  strange  duplex  action  of  the  saving  process 
can  be  observed  whenever  it  assumes  this  "Impairing" 
form:  on  the  one  hand  that  process  creates  cash  funds 
which,  once  accrued,  will  seek  investment;  on  the  other 
hand  it  creates  market  conditions  which  enable  those 
funds  to  find  investment — the  bridge  between  Impair 
Savings  on  the  one  hand,  and  their  investment  on  the 
other,  being  the  impoverishment  of  the  community.  This 
specific  duplex  action,  which  constitutes  the  ruling  fea- 
ture of  the  "Impairing"  form  of  the  saving  process,  and 
which  comes  into  play  especially  at  seasons  of  depression, 
opens  up  a  new  field  for  investments  strictly  in  propor- 
tion as  the  regular  fi&d-  °*'  investment,  the  formation  of 
new  productive  capital,  narrows  down. 
****•**• 

The  Impairing  Form  of  Investment  is  not  solely  con- 
fined to  periods  of  depression.  It  pervades  all  times, 
varying  in  intensity,  however.  It  may  be  considered  as 
the  complement  of  the  Capitalistic  Form,  inasmuch  as  the 
two  forms,  co-existing  as  they  are,  absorb  between  them- 
selves all  savings  funds  that  are  not  needed  for  Replace- 
ments (see  pajxe  36).  But  the  share  of  absorption  be- 
tween the  two  forms  varies.  At  very  prosperous  seasons 
most  of  the  savings  will  be  invested  in  the  Capitalistic 
Form,  and  only  an  insignificant  share  in  the  Impairing; 
at  hard  times,  however,  the  proportion  may  be  half  and 
half.  An  intermediate  proportion  will  prevail  at  seasons 
which  are  neither  prosperous  nor  poor.  In  new  and 
progressive  countries,  like  the  United  States,  the  Cap- 


84  The  "Neglected  Point"  as  the 

italistic  Form  will  predominate;  in  unprogressive  coun- 
tries, like  China,  the  Impairing  Form.  The  latter  is  also 
more  pronounced  in  highly  developed  countries,  where 
most  of  the  available  resources  have  already  been  cap- 
italized and  where,  in  consequence,  we  find  the  masses 
not  so  well  employed  as  in  the  United  States,  occupying 
a  lower  standard  of  life  in  consequence.  That  the  two 
forms  of  saving  co-exist  in  our  communities,  is  clearly 
shown  by  the  results;  we  see  on  the  one  hand  a  constant 
increase  of  capital,  due  to  the  Capitalistic  class  of  saving ; 
on  the  other  hand  a  chronic  lack  of  demand,  due  to  sav- 
ing of  the  Impairing  class. 

The  individual  saver  seldom  has  any  means  of  know- 
ing whether  his  funds  belong  in  the  one  class  or  in  the 
other;  nor  does  he  care  to  know,  as  in  either  case  he  can 
invest  them.  He  may  put  them  in  a  savings  bank,  or  loan 
them  out  on  mortgage,  or  buy  a  house,  or  securities,  or 
other  kind  of  property  with  them;  but  what  finally  be- 
comes of  the  funds,  after  he  has  thus  transferred  them  to 
others — whether  they  serve  to  increase  the  country's 
wealth  or  whether  they  do  not,  that  is  none  of  his  busi- 
ness, and  is,  in  most  cases,  beyond  his  control. 

As  a  rule  we  may  take  it  that  such  funds  as  the  saver 
does  not  make  use  of  himself,  will  always  be  invested  in 
the  Impairing  Form,  this  being  their  natural  and  primary 
tendency,  unless  they  be  deflected  from  that  course  by 
being  drawn  into  some  capitalistic  enterprise.  Looking 
at  the  matter  from  this  standpoint  it  becomes  clear  why 
savings,  if  not  finding  investment  in  the  Capitalistic 
Form,  will,  quite  automatically,  find  it  in  the  Impairing 
Form.  **.*****« 

It  should  be  well  understood  that  the  harm  brought 
about  by  Impair  Savings  is  of  a  temporary  nature  only; 
it  ceases  as  soon  as  the  savings  funds  re-enter  the  channels 
of  industry  and  trade,  which  is  the  case  whenever  they  are 


True  Cause  of  Depressions.  85 

spent  for  purposes  of  consumption,  and  are  thus  turned 
into  goods  or  services. 

As  it  were,  each  individual  case  of  saving,  of  the  Im- 
pairing Form,  brings  with  it  its  own  sphere  of  ill  effects, 
the  latter  terminating  as  soon  as  the  funds  are  finally 
expended  for  consumptibies.  As  a  general  rule  the  pro- 
cess, from  beginning  to  end,  is  short-lived,  so  far  as  each 
individual  case  is  concerned.  But  the  multitude  of  cases 
and  their  constant  recurrence,  in  connection  with  the 
aggravation  caused  by  the  Multiplying  Principle,  pro- 
duce those  conditions  which  in  their  entirety  manifest 
themselves  in  the  shape  of  stagnation  in  trade,  and  in  the 
consequent  unemployment  of  a  large  part  of  the  working 
forces. 

How  long  it  takes  before  the  harmful  action  is  termi- 
nated in  each  individual  case,  and  how  much  scope  the 
Multiplying  Principle  has  had  in  the  meantime,  depends 
upon  circumstances,  which  have  been  explained  in  the 
footnote  on  page  49.* 

*  In  connection  with  the  varying  results  traceable  to  the  opera- 
tion of  the  saving  process  in  the  different  countries,  a  peculiar  point 
of  great  practical  importance  should  not  be  lost  sight  of.  One  would 
naturally  conclude  that  if  Impair  Savings  are  the  underlying  cause 
of  the  disproportion  between  demand  and  supply,  then,  the  greater 
the  aggregate  of  Impair  Savings,  the  greater  the  injury  they  bring 
about;  as  it  were,  Impair  Savings  aggregating  three  billions  should 
be  three  times  more  harmful  than  an  aggregate  of  one  billion.  This 
conclusion,  however,  is  subject  to  important  modifications. 

For  the  sake  of  illustration  let  us  imagine  two  provinces  whose 
resources  are  being  drained  by  the  enemy,  one  of  them  having  been 
subjected  to  forced  contributions  for  a  year  or  two,  the  other  only 
for  a  short  time.  Naturally  the  contributions  come  in  more  freely 
from  the  latter  province  than  from  the  former,  whose  resources  are 
fairly  exhausted.  Suppose  the  proportion  of  the  contributions  be  as 
3  to  1.  Now,  if  we  were  to  take  this  proportion  of  3  to  1  as  a  meas- 
ure of  the  damage  relatively  sustained  by  the  two  provinces,  we 
would  be  wrong,  inasmuch  as  the  exhausted  province  may  suffer  far 
more  from  the  extortion  of  one  million  than  the  other  from  the  loss 
of  three  millions.  Just  so  with  regard  to  the  injury  sustained  by 
different  countries  from  Impair  Savings.  In  the  United  States  the 
latter  may  aggregate  one  billion  during  a  year  of  depression;  in 
China,  the  country  of  permanent  depression,  they  may  not  aggregate 
one-quarter  of  that  sum,  and  still  work  far  more  mischief  than  the 
larger  sum  in  the  United  States.  To  account  for  this,  we  have  to 
bear  in  mind  that  Impair  Savings  necessitate  a  change  of  posses- 
sion, the  non-savers  losing  property  in  the  same  proportion  as  the 
savers  acquire  it,  and  evidently  this  change  of  possession  can  more 
readily  he  effected  in  a  rich  country,  where  there  are  many  wealthy 
non-savers  who  have  property  to  lose,  than  in  a  country  like  Chi- 


86  The  "Neglected  Point"  as  the 

Though  the  harmful  action,  brought  about  by  the  Im- 
pair Savings,  ceases  as  soon  as  the  savings  are  expended 
for  commodities,  it  is  important  to  remember  that  such 
expenditure  can  not  take  place  before  the  damage  is 
done-  ******** 

According  to  the  views  now  prevailing  on  the  sub- 
ject, savings,  as  a  rule,  will  benefit  the  community  if  in- 
vested, and  will  prove  harmful  only  if  hoarded.  Look- 
ing at  the  matter  in  the  light  of  our  investigation,  how- 
ever, we  find  that  savings  are  invested  to  a  large  extent 
in  a  manner  which  will  not  benefit  the  community,  but 
impoverish  it  and  will  largely  impede  trade  and  business 
activity.  Let  us  summarize  the  leading  features  of  these 
various  forms  of  the  saving  process,  including  the  hoard- 
ing form  (always  keeping  in  mind  that  the  difference  be- 
tween the  several  forms  depends  entirely  upon  the  man- 
ner of  applying  the  savings)  as  follows: 

THE  HOARDING  FORM,  where  savings  are  not  invested 
at  all,  but  remain  in  the  shape  of  idle  cash  funds,  at 
least  for  a  long  time.  This  form  is  known  to  be 
highly  injurious  to  business. 

na,  where  poverty  is  the  rule.  And  we  further  have  to  bear  in  mind, 
that  until  this  change  of  possession  is  effected,  the  saved-up-funds 
will  not  re-enter  their  legitimate  course  in  the  channels  of  industry, 
trade  and  consumption  (the  Red  Ring  of  the  Chart),  and  in  the 
meantime  the  "lack  of  demand"  will  multiply,  unemployment  will 
spread,  and  incomes  will  shrink  amongst  the  producing  classes. 

The  injury,  therefore,  which  is  brought  about  by  Impair  Savings 
cannot  be  gauged  by  the  totals  which  they  represent,  but  is  de- 
pendent very  much  upon  circumstances.  As  a  general  thing,  the 
poorer  a  country,  the  more  harm  will  they  bring  about,  and  the 
more  will  the  harm  be  likely  to  assume  a  permanent  character;  the 
richer  a  country,  the  less  harm.  Within  one  and  the  same  country, 
however,  the  damage  done  will  more  closely  correspond  to  the  ag- 
gregate of  Impair  Savings,  though  even  here  an  exact  ratio  does  not 
obtain;  doubling  the  amount  of  Impair  Savings  will  more  than 
double,  perhaps  quadruple,  the  annihilation  of  income. 

In  a  certain  way  we  may  liken  the  harm  done  by  Impair  Sav- 
ings to  that  done  by  hoarding.  An  amount  of  $1,000,  withdrawn 
from  circulation  and  hoarded,  is  sure  to  bring  with  it  more  or  less 
disturbance  by  engendering  a  diminution  of  the  demand;  but  evi- 
dently to  a  far  greater  extent  in  a  country  like  China  where  cash 
funds  are  quite  scarce  (and  where  their  disappearance  is  more  felt) 
than  in  the  United  States,  where  they  are  incomparably  more 
abundant.  What  holds  true  of  hoarding  also  holds  true  of  Impair 
Savings,  though  in  a  lesser  degree. 


True   Cause  of  Depressions.  87 

THE  CAPITALISTIC  FORM,  where  savings  are  invested 
in  the  creation  of  new  wealth,  principally  such  as  con- 
sists of  productive  capital.  Here  the  act  of  invest- 
ment will  turn  the  savings  into  income  for  those  to 
whom  the  money  goes,  in  the  shape  of  payment  for 
services  rendered ;  which  services  may  be  rendered 
either  in  the  construction  of  said  capital,  or  in  the 
production  of  the  material  for  it.  This  form  entails 
no  lack  of  demand  for  working  forces  (though  there 
is  more  or  ]ess  shifting  of  the  latter),  but  will  rather 
stimulate  the  demand,  and  tend  to  increase  produc- 
tion and  to  help  business.  It  enriches  the  savers  as 
well  as  the  community,  and  is  the  basis  of  all  accu- 
mulated wealth. 

THE  IMPAIRING  FORM,  where  savings  are  invested 
not  in  the  creation  of  new  wealth  but  in  the  acquisi- 
tion of  property  already  existing;  this  in  connection 
with  the  impoverishment9  of  the  previous  owners,  and 
the  impoverishment  being  brought  about  by  the  very 
saving  activity  on  the  part  of  the  savers.  *  This  form 
of  saving  differs  from  the  Hoarding  Form  inasmuch 
as  the  savings  funds  are  not  left  idle  for  any  length 
of  time,  but  are  seeking  a^d  finding  investment.  It 
differs  from  the  Capitalistic  Form  inasmuch  as  it  does 
not  lead  to  the  formation  of  new  capital.  It  en- 
riches the  savers  at  the  expense  of  the  non-savers, 
making  the  latter  lose  as  much  property  as  the  savers 
gain,  but  in  addition  making  the  community  lose  in- 
come to  a  much  larger  amount  (see  page  43).  It 
tends  to  lessen  the  demand  and  thereby  to  impair 
business  activity,  though  not  to  such  an  extent  as  the 
Hoarding  Form  does. 

The  three  forms  of  saving  enumerated  above  com- 
prise only  such  savings  funds  as  are  available  for  the 
creation  of  additional  wealth — the  "Net  Savings "  of  the 
Chart.  Other  savings  are  required  for  Replacements 

*  The  above  does  not  mean  that  if  B,  owing  to  impoverishment, 
has  to  sell  his  house  to  A,  it  must  be  specifically  A's  saving  activity 
which  made  B  poorer.  His  impoverishment  is  due  to  general  market 
conditions,  to  the  lack  of  demand  brought  about  by  the  concurrent 
saving  activity  of  a  great  number  of  individuals. 


88    The  "Neglected  Point"  as  True   Cause  of  Depressions. 

(see  page  36),  and  for  various  minor  purposes.  The  lat- 
ter, however,  do  not  cut  much  of  a  figure  so  their  dis- 
cussion need  not  come  within  the  scope  of  our  present 
inquiry. 

******** 

Apparently ',  depressions  are  due  to  the  relaxation  in 
new  constructions,  this  being  the  cause  most  generally 
assumed  in  modern  economics.  The  real  cause,  however, 
must  be  found  in  the  fact  that  the  saving  activity  changes 
its  character — the  Impairing  Form  of  Saving,  as  just 
defined,  prevailing  to  a  much  larger  extent  at  times  of 
depression. 

There  is  only  one  remedy  for  depressions,  and  that 
is,  The  prevention  of  Impair  Savings.  To  attain  this  end, 
two  methods  are  imaginable — first,  by  creating  unlimited 
opportunities  for  profitable  investment  in  building  up 
new  productive  capital,  so  that  all  savings,  no  matter  to 
what  extent  they  accrue,  can  find  investment  in  the  Cap- 
italistic Form — which  method,  as  explained  on  pages  62 
to  64,  would  be  impossible  to  follow  out;  second,  by 
checking  the  saving  activity,  so  as  to  limit  the  aggregate 
of  savings  to  such  a  volume  as  can  find  investment  either 
in  the  Capitalistic  Form  or  in  Replacements  (see  page 
36),  and  thus  prevent  the  very  formation  of  an  excess  of 
savings.  If  we  could  bring  the  saving  activity  under  con- 
trol so  as  to  allow  it  free  scope  only  so  long  as  savings 
funds  can  find  ready  investment  in  the  creation  of  new 
wealth,  but  check  it  or  impede  it  whenever  the  oppor- 
tunities for  such  kind  of  investment  become  scarce — 
then  we  would  have  the  means  in  our  hands  for  prevent- 
ing depressions.  Whether  a  simple  and  practicable 
means  can  be  found  to  attain  this  end — that  ic  a  question 
which  it  is  not  the  purpose  of  this  treatise  to  discuss. 


CHAPTER    VI. 

PROS  AND  CONS. 

THE  primary  cause  of  depressions  has,  in  the  previous 
chapter,  been  traced  to  the  saving  process.  Many 
authors  have,  before  this,  arrived  at  the  same  conclusion 
and  have  insisted  upon  the  existence  of  such  a  connec- 
tion, without,  however,  succeeding  in  proving  it.  Their 
arguments  were  met  by  such  forceful  objections  and 
counter-arguments  that  all  efforts  heretofore  made  to 
establish  that  connection,  must  be  considered  as  failures. 
As  matters  now  stand,  the  great  majority  of  economists 
are  inclined  to  look  only  at  the  bright  side  of  the  saving 
process,  not  at  its  dark  side.  The  latter,  viz.,  its  Impair- 
ing Form,  has  so  far  remained  unknown,  and  therefore 
beyond  the  reach  of  consideration.  Just  so  with  the 
Multiplying  Principle,  which  is  a  sequence  of  that  Im- 
pairing Form.  These  two  factors  known,  and  their  ex- 
istence fully  established,  the  situation  is  changed,  and 
the  weak  points  of  the  above-mentioned  counter-argu- 
ments and  objections  can  readily  be  discerned.  1  shall, 
in  the  following  pages,  enumerate  and  discuss  a  number 
of  the  "objections"  above  referred  to,  and  shall  further- 
more consider  some  additional  ones  which,  though  not 
taken  from  current  literature,  will  readily  present  them- 
selves, from  the  standpoint  of  the  views  now  ruling,  as 
bearing  agamst  the  Impair-Savings  Theory,  and  I  will 
show  where  they  are  wrong. 

OBJECTION  I\IO.  1. --According  to  a  well-established 
axiom  every  producer  who  is  willing  to  sell  brings  a  de- 
mand into  the  market  equalling  the  value  of  the  goods  he 
offers;  for  instance,  if  he  offers  to  sell  a  hundred  dollars' 
worth  of  wheat,  he  does  so  with  the  intention  of  buying 


90  Pros  and  Cons. 


a  hundred  dollars'  worth  of  other  goods  with  the  pro- 
ceeds, which  would  mean  a  demand  to  that  extent.  This 
demand  asserts  itself  not  only  where  he  expends  the 
money  in  the  usual  manner,  i.  e.,  buying  commodities,  but 
also  if  he  saves  it  and  invests  it.  The  investment,  no 
matter  in  what  shape  it  takes  place,  means  buying  some- 
thing or  other,  and  therefore  means  demand.  Hence,  the 
view  that  there  should  be  a  shortage  of  the  demand  when- 
ever the  investment  assumes  a  certain  form  (the  Impair- 
ing Form),  contravenes  the  above-mentioned  well-estab- 
lished axiom. 

REPLY. — A.  demand  of  some  kind  may  spring  up,  due 
to  the  investment;  but  this  need  not  necessarily  be  a  de- 
mand for  working  forces — and  it  is  this  point  which  de- 
cides whether  there  will  be  unemployment,  and  event- 
ually depression  in  trade  or  not. 

Most  economists  do  not  admit  this  distinction  and 
they  hold  that  the  demand,  irrespective  of  the  shape  it 
assumes,  will  in  some  way  or  other  lead  to  the  employ- 
ment of  working  forces6.  Let  us  take  some  examples  to 
see  whether  this  view  will  always  agree  with  the  facts. 

Suppose  that  the  man  who  realized  the  $100  from  the 
sale  of  wheat  expends  the  money  in  the  purchase  of  com- 
modities. Then  the  latter  will  be  reproduced,  either  in 
the  same  shape  or  in  some  other  shape,  and  this  reproduc- 
tion will  call  one  hundred  dollars'  worth  of  working 
forces  into  activity.  Such  kind  of  demand,  therefore, 
which  calls  for  commodities,  is  practically  identical  with 
a  demand  for  working  forces. 

Suppose  that  instead  of  buying  commodities  the  man 
saves  and  invests  the  $100.  applying  it  towards  the  build- 
ing of  a  house.  This  would  likewise  give  employment  to 
working  forces,  no  matter  whether  the  money  be  paid  out 
for  wages  or  in  the  production  of  building  material.  So 
the  demand  ensuing  would  also  be  of  the  desirable  kind. 

But  if  the  investment  does  not  take  the  shape  of 
new  constructions  or  extensions  or  improvements,  and 


Pros  and  Cons.  91 


does  not  lead  to  some  enterprise  that  will  set  working 
forces  in  motion,  and  is  not  absorbed  in  renewals  or  re- 
pairs^— in  other  words,  if  the  investment  takes  place  in 
that  particular  shape  which  is  peculiar  to  periods  of  de- 
pression— can  we  still  assert  that  the  investment  of  the 
$100  will  create  a  demand  for  one  hundred  dollars'  worth 
of  working  forces?  If  it  does,  the  manner  in  which  this 
is  effected  should  be  explained;  but  that  has  never  been 
done  by  our  economists. 

That  a  demand  finally  springs  up,  such  as  will  convert 
the  savings  funds  into  goods,  remains  undisputed.  But 
let  us  consider  the  conditions  under  which  it  arises. 

In  the  regular  course  of  business  each  individual's 
demand  (i.  e.,  the  final  demand,  either  on  his  part  or  on 
the  part  of  his  family,  for  purposes  of  consumption),  de- 
pends upon  his  income — from  wages,  profits  or  whatever 
source.  And  the  extent  of  his  income  practically  repre- 
sents the  potentiality  of  his  purchasing  power  or  demand. 
Thus,  the  wheat-grower  referred  to  above  brings  a  hun- 
dred dollars'  worth  of  demand  upon  the  market  only  be- 
cause he  has  earned  that  much  from  the  sale  of  the  wheat. 
And  such  earning  power  must  be  regarded,  from  an  eco- 
nomic standpoint,  as  the  legitimate  source  of  all  demand. 
But  is  it  also  the  source  of  the  demand  where  Impair 
Savings  intervene?  No.  Here  the  individual,  as  has 
been  shown  in  Chapter  III,  does  not  earn  the  $100  which 
he  expends  for  commodities.  The  demand  which  he 
brings  upon  the  market  does  not  originate  from  his  in- 
come but  from  dire  necessity,  from  the  fact  that  he  needs 
food,  and  clothing,  and  shelter,  in  order  to  live.  The  de- 
mand arising  from  this  necessity  exists  quite  irrespective 
of  his  income,  and  irrespective  of  the  amount  of  Impair 
Savings  accruing  in  somebody's  hands.  It  would  there- 
fore be  wrong  to  assume  that  the  investment  of  these 
savings  funds  originates  the  demand. 


92  Pros  and  Cons. 


Where  the  savings  funds,  when  being  invested,  come 
to  the  receivers  in  the  shape  of  income,  they  create  a  de- 
mand for  working  forces,  the  extent  of  this  demand  be- 
ing dependent  strictly  upon  the  amount  of  the  savings 
funds.  When  invested  in  the  Impairing  Form,  however, 
the  act  of  investment  does  not  create  such  a  demand. 
There  is  a  demand  for  commodities,  but  it  is  not  caused 
by  the  investment.  Though  the  funds  finally  come  to  be 
expended  for  commodities,  the  money  comes  to  the  re- 
ceivers not  in  the  shape  of  income,  but  through  alienation 
of  property  or  by  borrowing — -over  the  bridge  of  their 
own  impoverishment. 

OBJECTION  NO.  2.— The  argument  given  in  the 
pages  just  preceding  does  not  prove  a  minus  of  demand 
to  result  from  the  saving  activity,  in  its  so-called  "Im- 
pairing Form."  It  is  a  well  known  fact  that  savings 
funds,  say  $100,  will,  in  the  course  of  their  investment, 
be  finally  expended  for  commodities;  then  they  will  call 
not  only  for  goods  but  also  for  working  forces  (to  re- 
produce these  goods),  and  this  represents  a  demand  for 
$100  which  offsets  the  original  shortage  of  demand  en- 
gendered by  the  saving  activity, — no  matter  how  the  $100 
comes  to  those  who  buy  the  commodities,  whether  in  the 
shape  of  income  or  in  some  other  way.  If  the  original 
shortage  is  compensated  for  by  a  final  plus,  no  minus 
can  remain. 

REPLY. — Much  has  been  made  of  the  fact  that  sav- 
ings funds,  no  matter  how  they  are  invested,  are  finally 
transformed  into  goods.  To  test  the  merit  of  this  con- 
tention, let  us  resolve  the  saving  process  into  the  three 
phases  of  which,  as  a  matter  of  fact,  it  is  composed,  and 
note  how  these  several  phases  vary  in  their  influence 
upon  the  demand  for  working  forces,  according-  to 
whether  the  saving  process  assumes  the  Capitalistic  Form 
or  the  Impairing — always  bearing  in  mind  that  (as  as- 
sumed above)  a  demand  for  commodities  is  equivalent  to 
a  demand  for  working  forces6. 


Pros  and  Cuns.  93 


THE  THREE  PHASES  UNDER   THE  CAPITALISTIC 
FORM  OF  SAVING. 

PHASE  A — This  comprises  the  saving  activity  as  such. 
As  is  well  understood,  the  act  of  saving  will,  primar- 
ily, tend  to  create  a  curtailment  of  the  demand  for 
working  forces. 

PHASE  B — consists  of  the  investment;  either  in  some 
enterprise  or  in  some  new  construction,  say,  in  build- 
ing a  house.  Here,  the  act  of  investing  brings  em- 
ployment to  working  forces,  and  therewith  income, 
thus  counteracting  the  injurious  tendency  of  Phase  A. 

PHA  SE  C — consists  of  the  transformation  of  the  savings 
funds  into  goods.  This  takes  place  whenever  the 
working  forces  to  whom  the  money  goes  by  the  act 
of  investment,  expend  that  money  for  consumptibles 
and  commodities. 


THE    THREE    PHASES    UNDER    THE    IMPAIRING 
FORM  OF  SAVING. 

PHASE  AA — The  saving  activity  as  such;  which  tends 
to  throw  working  forces  out  of  employment,  the  same 
as  Phase  A. 

PHASE  BB — The  investment;  this  is  effected  by  the  pur- 
chase of  capital2  already  existing,  say,  of  a  house, 
sold  by  the  owner  to  meet  his  living  expenses;  or, 
eventually,  by  making  a  loan  on  the  house.  Here,  the 
act  of  investment  provides  neither  employment  nor 
income  for  working  forces;  hence,  the  injurious  tend- 
ency emanating  from  Phase  AA  is  not  counteracted. 

PHA  SE  CC —  The  transformation  of  savings  funds  into 
goods;  this  takes  place  whenever  the  loan,  or  the  pro- 
ceeds of  the  sale  of  the  house  (which,  as  premised,  the 
owner  had  to  dispose  of  under  the  stress  of  necessity) 
are  being  expended  for  commodities. 

Comparing  Phase  B  of  the  one  form  of  saving  with 
Phase  BB  of  the  other,  we  arrive  at  a  striking  contrast. 


94  Pro*  and  Cons. 


In  the  one  case  the  act  of  investment  will  create  a  de- 
mand for  working  forces ;  in  the  other  it  will  not. 

While  the  savings  funds  are  in  both  cases  finally 
transformed  into  goods,  a  vital  difference  can  be  observed 
before  this  transformation  takes  place.  A  sum  of  $100, 
if  invested  under  the  one  form  of  saving-  will,  as  it  were, 
create  two  demands  and  will  call  for  $200  worth  of  work- 
ing forces,  namely,  $100  when  the  house  in  question  is 
being  built  and  again  $100  when  the  receivers  of  this 
money  (the  builders  of  the  house)  expend  it  for  com- 
modities— while  under  the  other  form  only  one  demand 
arises,  viz.,  whenever  the  $100  is  being  spent  for  com- 
modities. 

Another  point  of  difference,  of  highest  importance, 
comes  to  light  when  we  consider  the  following:  While 
the  investment,  under  the  Capitalistic  Form,  gives  rise  to 
two  demands  for  working  forces,  and  while  the  combined 
process  of  saving  and  investing  necessitates  three  de- 
mands (one  for  the  work  of  the  saver,  one  for  the  work 
of  the  builders,  and  one  for  the  producers  of  the  com- 
modities called  for  under  Phase  C)  we  find,  under  the 
Impairing  Form,  only  two  demands  (one  for  the  work  of 
the  saver  and  one  for  the  producers  of  the  commodities 
called  for  under  Phase  CC) ;  but  these  two  demands  re- 
quire the  participation  of  three  distinct  parties  (working 
forces)  before  they  can  become  effective:  first,  the  saver; 
second,  the  borrower10;  third,  the  producers  of  the  com- 
modities called  for  under  Phase  CC.  Let  us  repeat,  un- 
der the  Capitalistic  Form  of  the  saving  process  (saving 
and  investing  combined)  we  find  three  sets  of  working 
forces  and  a  demand  for  each  of  them ;  under  the  Impair- 
ing Form  it  likewise  takes  three  sets  of  working  forces 
(the  saver,  the  borrower10,  and  the  producers  of  the  com- 
modities) before  the  savings  funds  can  find  their  way 
back  into  the  channels  of  production  and  trade — but  of 


Pros  and  Cons.  95 


these  three  sets  only  two  will  find  a  demand  for  their  ser- 
vices, the  one  set  (the  borrower)  being  condemned  to 
idleness. 

Where  we  have  three  sets  of  working  forces  and  three 
demands,  one  for  each,  there  is  no  occasion  for  a  disturb- 
ance of  the  equilibrium  betwen  supply  and  demand.  But 
a  disturbance  in  the  labor  market  is  bound  to  follow 
where,  as  is  the  case  under  the  Impairing  Form  of  Sav- 
ing, we  have  three  sets  of  working  forces  and  only  two 
demands  between  them. 

A  disproportion  in  the  labor  market,  with  an  undue 
preponderance  of  the  supply,  means  unemployment  for 
part  of  the  working  classes,  lack  of  income^  lack  of  pur- 
chasing power,  lack  of  demand  for  commodities,  and 
stagnation  m  business. 

This  disproportion  can  not  be  remedied  by  a  different 
distribution  of  the  working  forces,  or  by  removing  part  of 
them  to  a  different  country.  The  presence  of  these  unem- 
ployed working  forces,  who  consume  (even  though  to  a 
much  reduced  extent)  without  producing,  is  essential  to 
furnish  a  contingent  of  borrowers10  (as  per  Phase  BB), 
this  in  order  to  bring  the  savings  funds  back  into  the  chan- 
nels of  production  and  trade — otherwise  the  saving  pro- 
cess would  assume  the  Hoarding  Form  instead  of  the  Im- 
pairing, and  matters  would  be  still  worse.  Though,  as 
just  stated,  the  consumptive  power  of  the  unemployed  is 
much  reduced,  say,  from  100  down  to  20,  the  stepping  in 
of  the  Multiplying  Principle  (page  43)  increases  their 
number  so  as  to  bring  their  combined  borrowing  power10 
up  sufficiently  to  absorb  all  Impair  Savings.  Thus,  while 
it  may  take  one  set  of  builders  to  absorb  $100  of  savings 
under  the  Capitalistic  Form,  in  the  shape  of  wages,  it 
may  take  five  sets  of  builders  to  absorb  the  $100  under 
the  Impairing  Form,  in  the  shape  of  borrowings. 


Pros  and  Cons. 


It  should  be  well  understood  that  the  saving  process 
will  surely  cause  a  dislocation  between  supply  and  de- 
mand unless  employment  be  given  to  working  forces 
BY  THE  ACT  OF  INVESTING.  The  mere  fact  that 
a  demand  for  working  forces  will  spring  up  later  on, 
subsequent  to  the  investment,  is  not  sufficient. 

The  basic  fact  stated  in  "Objection  No.  2"  remains 
undisputed,  namely:  While  the  saving  of  $100  will  pri- 
marily create  a  shortage  of  demand,  there  will  be  an 
equivalent  plus  of  demand,  even  under  the  Impairing 
Form  of  Investment,  when  in  the  course  of  the  invest- 
ment the  $100  is  expended  for  commodities  and  trans- 
formed into  goods.  But  our  economists  are  wrong  when 
concluding  from  this  fact  that  the  final  plus  will  always 
compensate  for  the  original  minus.  They  overlook  the 
possibility  that,  to  obtain  the  final  plus,  it  may  take  the 
participation  of  two  sets  of  working  forces,  with  a  de- 
mand for  the  services  of  only  one  of  these  two  sets,  leav- 
ing the  other  set  unemployed — as  is  so  often  the  case  at 
times  of  depression. 

OBJECTION  NO.  3.— While  it  is  true  that  invest- 
ments in  new  constructions  will  increase  the  demand  for 
working  forces  above  the  normal,  a  hundred  dollars  thus 
invested  giving  rise  to  two  demands  of  a  hundred  dollars 
each,  as  explained  in  the  foregoing  pages;  and  while  it 
is  true  that  if  the  investment  takes  place  in  a  different 
way,  it  may  call  for  only  one  hundred  dollars'  worth  of 
working  forces — the  latter  form  of  investment  should  not 
be  construed  as  involving  a  minus  of  demand. 

It'  we  turn  to  ordinary  business  transactions  in  the 
line  of  production  and  trade,  we  find  there,  too,  only  one 
demand  for  an  equivalent  supply,  a  dollar's  worth  of 
the  one  for  a  dollar's  worth  of  the  other,  and  no- 
body will  construe  this  one  demand  to  constitute  a 
minus  of  demand.  Whj',  then,  should  we  have  a  minus  of 


Pros  and  Cons.  97 


demand  in  the  case  of  the  so-called  Impairing  Form  of 
Investment,  if  admittedly  every  dollar  so  invested  will  be 
turned  into  goods  and  will  call  for  a  dollar's  worth  of 
working  forces? 

REPLY. — The  above  contention  is  to  some  extent 
identical  with  "Objection  No.  2":  but  the  principle  in- 
volved is  so  important,  and  my  deductions  differ  so  much 
from  accepted  views,  that  it  may  not  be  amiss  to  analyze 
the  subject  from  various  standpoints. 

Above  all  we  have  to  bear  in  mind  that  where  the 
supply  represents  work  done,  or  services  rendered  by 
working  forces,  the  demand  must  involve  a  demand  for 
working  forces,  and  not  merely  for  capital  goods,  other- 
wise it  can  not  constitute  an  offset  for  the  supply  afore- 
mentioned. In  order  to  ascertain  how  far  a  demand  for 
working  forces  takes  place  under  the  Impairing  Form  of 
Investment,  in  contrast  with  the  demand  arising  in  ordi- 
nary business  transactions,  let  us  adopt  a  method  similar 
to  that  used  in  bookkeeping,  where  they  put  the  Debit 
on  the  one  side  and  the  corresponding  Credit  on  the 
other;  but  instead  of  following  up  Debit  and  Credit  let 
us  ascertain  demand  and  supply,  putting  the  Demand 
for  working  forces  in  one  column  and  the  Supply  thereof 
:n  another.  By  this  method  we  are  enabled  to  compare 
Demand  and  Supply  under  the  two  conditions  above  re- 
ferred to,  i.  e.,  under  the  Impairing  Form  of  saving  and 
investing,  as  well  as  where  no  saving  takes  place  at  all. 
In  making  these  comparisons  a  distinction  should  be 
drawn  between  what  might  be  called  "active"  supply  of 
working  forces,  i.  e.,  where  the  latter  are  actually  utilized 
—as  against  an  "inactive"  supply  of  working  forces, 
where  the  latter,  though  standing  ready  to  do  the  work, 
find  no  employment  and  are  compelled  to  remain  in- 
operative. 


98 


Pros  and  Cons. 


ACTIVE  DEMAND  FOR  WORKING  FORCES 
COMPARED  WITH  THE  ACTIVE  SUPPLY  THEREOF. 

FIRST.— UNDER  ORDINARY  BUSINESS  CONDITIONS  COMPRIS- 
ING ONLY  PRODUCTION  AND  CONSUMPTION:  ALL  SAVING 
BEING  EXCLUDED. 


A,  a  non-saver,    who  produces   goods   worth   $100, 

and    consumes   goods   worth    $100,    will   supply 

active  working  forces  to   the  amount  of 

and   a    demand     for     working     forces    to   the 
amount  of   

B,  the   individual    (or   group   of   individuals)    who 
by   his   work    earns    the    $100    expended   by   A, 
and    in    turn    expends    money    for    consumpt- 
ibles   to   the   like   amount,    will   supply   active 

working  forces   worth 

and    a    demand    for    working    forces     to     the 
amount    of    


Supply. 


$100 


$100 


Demand. 


$100 


$100 


From  the  above  comparisons,  which  may  be  continued 
ad  infinitum,  it  will  readily  be  seen  that  so  long  as  the 
saving  process  does  not  come  into  play  there  need  be  no 
minus  or  shortage  of  demand,  and  no  dislocation  between 
demand  and  supply,  a  dollar's  worth  of  the  one  quite  au- 
tomatically giving  rise  to  a  dollar's  worth  of  the  other. 

SECOND.— WORKING   FORCES   AS    AFFECTED   BY    THE    IMPAIR- 
ING FORM  OF  SAVING. 


A,  a  saver  who   produces   and  sells   goods   worth 

$100  (which  amount,  let  us  assume,  he  saves) 
will  supply  active  working  forces  to  the 

amount    of    

Whon  investing  the  $100  saved  as  above 
he  buys  property  already  existing,  but  of 
working  forces  he  buys 

B,  the  seller  of  that  property  and  receiver  of  the 

$100,  does  not  get  the  money  for  services 
rendered,  his  services  not  being  called  for 
and  remaining  "inactive.."  so  the  "active" 

working   forces    he    supplies   amount    to 

When  expending  the  money  for  con- 
sumptibles  he  brings  into  the  market  a  de- 
mand for  working  forces  amounting  to 


Supply. 


$100 


nothing 


Demand. 


$100 


Contrasting  the  two  tables  given  above,  we  find  that 
while  under  the  conditions  set  forth  in  Table  No.  1,  the 
supply  always  creates  an  equivalent  demand,  and  con- 
sumption goes  hand  in  hand  with  production,  represent- 
ing what  is  termed  "productive  consumption,"  Table  No. 
2  represents  a  certain  class  of  ''unproductive  consump- 
tion"; B,  the  consumer,  being  forced  to  idleness,  and  his 
services  remaining  uncalled  for,  owing  to  the  lack  of  de- 


Pros  and  Cons. 


99 


mand  in  the  market.  This  lack  of  demand  is  caused  by 
the  saving  activity  of  A,  in  conjunction  with  that  of  many 
other  individuals,  as  explained  in  Chapter  III.  While  the 
saving  activity  of  A  may  not  directly  lead  to  the  forced 
idleness  of  B,  it  certainly  causes  a  lack  of  demand  some- 
where and  helps  to  create  general  market  conditions 
which  reflect  upon  B  and  under  which  he  suffers. 

On  further  comparing  the  two  tables  we  find  that  the 
Impairing  Form  of  Investment,  as  per  Table  No.  2,  neces- 
sarily calls  for  two  men  (or  groups  of  men),  the  one,  A, 
supplying:  working  forces  (his  own)  to  the  community, 
but  buying  none  from  it;  the  other,  B,  buying  working 
forces  without  supplying  any.  So,  between  these  two 
parties  (working  forces)  there  is  only  one  demand  and 
one  active  supply.  Quite  different  are  the  conditions  set 
forth  in  Table  No.  1.  There  we  see  that  A  not  only  sup- 
plies but  also  buys,  and  that  B  not  only  buys  but  also 
supplies.  So  we  perceive  two  demands  and  two  supplies 
on  the  part  of  these  two  men;  whereas,  under  the  con- 
ditions as  per  Table  No,  2,  only  one  supply  and  one  de- 
mand can  be  found  to  appertain  to  the  two  men — which 
means  unemployment  on  the  part  of  B. 

If,  to  make  the  comparison  complete,  we  should  ex- 
tend this  method  of  investigation  to  the  Capitalistic  Form 
of  saving,  our  table  would  be  changed  as  follows : 

THIRD.— WORKING    FORCES    AS    AFFECTED    BY    THE    CAPITAL- 
ISTIC  FORM  OF   SAVING. 


A,  a  saver,  who  produces  and  sells  goods  worth 

$100    (which    amount    he    saves)    will    supply 

active  working  forces  to  the  amount  of 

When  investing  the  money  saved  as 
above,  say  in  building  a  house,  he  creates  a 
demand  for  working  forces  to  the  amount  of. 

B,  the   individual,    or   group   of   individuals,    who 
are    employed    in    building    the    house,    bring 
an   active   supply  of  working  forces   into  the 
market  amounting  to 

When  expending  this  money  for  con- 
sumptibles,  they  bring  into  the  market  a  de- 
mand for  working  forces  amounting  to 


Supply 
$100 


$100 


Demand. 


$100 


$100 


100  Pros  and  Cons. 


Contrasting  the  outcome  of  the  three  tables  we  find 
that  under  the  conditions  represented  by  Tables  No.  1 
and  3  the  supply  always  engenders  an  equivalent  demand 
for  working  forces;  while  under  the  conditions  covered 
by  Table  No.  2  it  does  not.  In  the  latter  case  the  savers 
sell  their  goods  or  their  services  to  "others,"  but  do  not 
give  "others"  an  opportunity  to  earn  their  money  back. 
This  class  of  saving  brings  upon  the  market  a  "lack  of 
demand"  as  a  tangible,  definite  and  positive  element — a 
fact  which  fully  confutes  the  position  taken  in  "Objec- 
tion No.  3."  ******** 

To  maintain  an  equilibrium  between  the  supply  of 
working  forces  and  the  demand  therefor,  each  man 
(workingman,  trader,  capitalist  &c.)  who  earns  a  dollar, 
i.  e.,  who  renders  a  dollar's  worth  of  services  to  others, 
should  buy  a  dollar's  worth  of  services  from  others.  It 
does  not  matter  whether  he  buys  direct,  or  through  his 
family,  or  through  third  parties;  nor  does  it  matter 
whether  he  earns  the  dollar  through  handiwork,  or  brain 
work,  in  the  shape  of  profits,  or  of  interest,  or  in  any 
other  way,  all  of  which  should  count  the  same  as  services 
rendered;  the  point  being  that  where  he  earns  a  dollar 
from  the  community  he  should  give  "others"  an  oppor- 
tunity to  earn  the  dollar  back.  He  does  so  if  he  buys 
commodities,  or  if  he  invests  the  dollar  in  some  enterprise 
or  construction,  or  if  he  saves  it  and  puts  it  in  the  money 
market  and  subsequently  somebody  else  invests  it  in  some 
construction  or  enterprise.  If  not  so  invested,  however, 
and  if  coming  to  those  "others"  in  the  manner  described 
in  Table  No.  2,  the  dollar  does  not  buy  the  services  of 
these  others  by  the  act  of  investment.  Then  a  disturb- 
ance of  the  equilibrium  between  the  supply  of  working 
forces  and  the  demand  for  them  is  bound  to  ensue. 

OBJECTION  NO.  4. — If  depressions  were  due  to  the 
saving  process,  the  countries  most  noted  for  the  saving 


Pros  and  Cons.  101 


habits  of  their  people,  like  France,  should  be  the  ones 
suffering  most  from  depressions  and  unemployment.  The 
reverse  is  true.  As  a  matter  of  fact,  we  find  France  to 
be  the  country  least  subject  to  depressions  and  their  at- 
tendant disturbances,  and  possessed  of  such  a  high  degree 
of  wealth  as  to  confirm  the  commonly-accepted  view  that 
the  most  saving  nations  are  the  wealthiest. 

REPLY  (a). — The  foregoing  Objection  is  wrong  in 
two  respects:  first,  in  losing  sight  of  the  difference  be- 
tween savings  and  Impair  Savings — a  larg«  volume  of 
the  one  being  by  no  means  identical  with  a  large  volume 
of  the  other;  second,  in  assuming  that  the  peoples  of 
greatest  saving  propensities  are  the  wealthiest. 

It  is  not  the  extent  of  the  saving  activity  and  not 
the  volume  of  surplus  earnings  which  does  the  harm;  all 
depends  upon  the  manner  of  investment.  In  a  country 
like  the  United  States  the  surplus  earnings  accruing  in 
the  course  of  a  year  may  be  ten  times  greater  than  in  a 
country  like  China,  still  there  may  be  "too  much  saving" 
in  the  latter  country,  and  in  the  former  not  enough  to 
meet  the  requirements,  i.  e.,  not  enough  to  supply  the 
funds  needed  for  new  enterprises.  Even  in  one  and  the 
same  country  the  savings1  may  at  one  time  be  quite  large 
and  still  not  too  large  for  the  country's  well-being;  at  an- 
other time  they  may  be  much  smaller  and  nevertheless 
too  large  to  be  absorbed  to  good  advantage.  In  the 
United  States  the  present  (1906)  rate  of  Net  Savings  ac- 
cruing, available  for  new  enterprises,  exceeds  three  bil- 
lions annually;  yet  there  would  be  room  for  additional 
savings  funds  if  they  could  be  had.  Twelve  years  ago 
(1894)  they  may  not  have  aggregated  much  more  than 
half  of  that  sum,  yet  they  were  too  large  to  be  absorbed 
in  the  Capitalistic  Form,  i.  e.,  in  the  creation  of  new  pro- 
ductive capital  or  wealth,  so  they  were  partly  invested 
in  the  Impairing  Form,  and  at  once  became  harmful.  I 


102  Pros  and  Cons. 


repeat,  all  depends  upon  the  manner  of  investment  as  to 
whether  the  saving  activity  is  beneficial  or  otherwise,  not 
upon  the  volume  of  savings. 

REPLY(b).— As  to  the  alleged  fact  that  the  most 
saving  nations  are  the  wealthiest,  we  first  have  to  define 
what  is  meant  by  a  "saving  nation,"  and  in  this  connec- 
tion have  to  make  a  sharp  distinction  between  mere  saving 
propensity  on  the  one  hand  and  actual  saving,  i.  e.,  ac- 
cumulating, on  the  other.  Paradoxical  as  it  may  seem, 
nations  of  great  accumulating  power,  like  the  United 
States,  are  not  those  of  greatest  saving  propensity;  and 
in  turn,  nations  of  great  saving  propensity,  like  China, 
are  not  the  wealthiest.  To  demonstrate  this  let  us  take 
up  various  countries  and  examine  the  saving  propensity 
as  well  as  the  accumulating  power  of  the  inhabitants. 

Above  all  others,  the  French  people  are  reputed  for 
their  saving  habits,  these  being  generally  taken  as  the 
source  of  their  great  wealth.  But  are  the  French  really 
as  saving  as  is  commonly  assumed?  Is  not  France  the 
very  birthplace  of  luxury?  And  is  luxury  consistent 
with  saving?  As  a  matter  of  fact  we  find  that  the 
wealthy  classes  in  France  are,  by  their  very  environments, 
required  to  live  up  to  their  means,  much  more  so  than  in 
other  countries,  and  in  consequence  there  are  but  few  of 
those  huge  individual  accumulations  of  wealth,  such  as 
we  see  in  England  and  in  the  United  States,  and  these 
few  are  mostly  in  the  hands  of  foreigners.  Inasmuch  as 
a  nation's  growth  in  capital  and  wealth  depends  largely 
upon  the  rich  people's  savings,  and  as  these  do  not 
amount  to  a  great  deal  in  France,  we  find  the  aggregate 
of  the  country's  internal  wealth  to  be  far  from  what 
should  be  expected  when  considering  the  people's  alleged 
great  saving  power;  and  the  annual  increase  of  that  ag- 
gregate is  actually  slower  than  in  other  leading  nations. 


Pros  and  Cons.  103 


This  tendency  to  live  up  to  their  means  is  not  nearly  so 
conspicuous  among  the  wealthy  middle  classes  of  France; 
but  even  here  (and  to  some  extent  even  among  the  lower 
classes)  we  find  a  greater  disposition  than  in  other  Euro- 
pean countries  to  keep  up  appearances,  to  dress  well,  to 
dine  well,  and  to  live  in  well-furnished  homes.  True, 
they  nevertheless  show  a  keen  disposition  to  save;  and 
though  this  disposition  largely  manifests  itself  in  the 
shape  of  haggling  to  get  the  most  value  for  the  money 
(a  trait  not  really  identical  with  "accumulating"),  still, 
the  accumulation  that  does  take  place  is  principally  due 
to  the  middle  classes.  On  the  whole,  however,  we  have 
to  conclude  that  the  saving  "propensity"  is  not  such,  a 
marked  characteristic  of  the  French  people  as  is  gen- 
erally assumed.  •  Though  they  possess  a  fair  share  of  this 
propensity,  the  latter  is  largely  modified  by  their  ten- 
dency towards  luxury — the  one  disposition  being  the  very 
opposite  of  the  other. 

While  France's  wealth  is  commonly  attributed  to  the 
great  saving  power  of  the  people,  facts  show  that  the 
country  does  not  excel  in  either  of  the  two  forms  of  sav- 
ing stated  above — neither  in  saving  propensity  nor  in 
actual  accumulation  of  internal  wealth.* 

A  much  more  pronounced  saving  propensity  than  ex- 
ists in  France  is  found  in  China;  and  if  such  a  disposi- 
tion of  itself  were  conducive  to  wealth,  China  ought  to 
be  rich.  A.S  a  matter  of  fact  it  is  very  poor.  The  saving 

*  As  is  well  known,  the  recent  expansion  of  France's  wealth  is 
represented  largely  by  the  acquisition  of  foreign  values,  not  so  much 
by  domestic  development;  in  other  words,  the  surplus  earnings  of 
the  people  are  to  a  great  extent  being  invested  in  foreign  securities, 
perhaps  more  so  than  in  creating  new  productive  property  at  home. 
It  was  a  fortunate  circumstance  for  the  Frencfl  people  to  find  an 
outlet  for  their  surplus  earnings  in  such  foreign  investments — an 
outlet  which  would  not  have  been  possible  without  the  intervention 
of  a  factor  which  will  be  explained  on  page  13^ .  Had  there  been 
no  other  avenue  for  the  investment  of  their  surplus  earnings  except 
that  afforded  by  home  enterprise,  France  neither  could  have  attained 
her  enviable  position  in  international  finance,  nor  would  her  domestic 
prosperity  be  equal  to  what  it  is  now. 


104  Pros  and  Cons. 


going  on  in  that  country  is  not  of  a  healthy  kind.  Such 
individual  accumulations  as  are  being  made  there,  hard- 
ly ever  find  investment  in  new  enterprises  or  in  the  in- 
crease of  wealth,  the  opportunities  for  such  kind  of  in- 
vestment either  not  existing  or  not  being  made  use  of, 
and  practically  no  new  capital  being  built  up  except 
where  European  funds  flow  in.  As  a  consequence  the 
saving  process  has,  long  before  this,  assumed  almost  ex- 
clusively the  Impairing  Form* — aggravated,  as  it  always 
is,  by  the  cumulative  effect  of  the  Multiplying  1'rinciple ; 
and  as  a  result  we  find  in  China  great  poverty  of  the 
masses,  unemployment,  stagnation  in  trade,  and  a  state 
of  permanent  depression. 

The  poverty  of  that  country  is  generally  attributed 
to  the  lack  of  labor-saving  machinery  and  to  the  prim- 
itive state  of  production.  The  introduction  of  labor- 
saving  machinery,  however,  is  not  encouraged  where 
manual  labor  is  abundant  and  exceedingly  cheap.  The 
abundance  of  labor  is  caused  by  unemployment  and  by 
the  general  lack  of  demand;  this  again,  as  heretofore  ex- 
plained, by  the  saving  activity,  if  it  assumes  the  Impair- 
ing (or  eventually  the  Hoarding)  Form — and  either  of 
these  two  forms  is  bound  to  come  into  play  whenever  the 

*  Economists  generally  hold  that  the  saving  process  in  that 
country  is  of  the  "hoarding"  type.  I  dare  say,  however,  that  old 
hoards  are  being  released  and  scattered  in  pretty  much  the  same 
proportion  as  new  hoards  are  forming,  otherwise  the  money  still  left 
in  circulation  would  be  quickly  absorbed  and  withdrawn.  Now,  if 
the  aggregate  of  hoards  does  not  increase,  the  scope  of  the  hoarding 
process  going  on  at  present  can  be  but  limited. 

On  the  other  hand  we  have  evidence  proving  the  Impairing  Form 
of  saving  to  be  quite  general  over  there.  If  Li  Hung  Chang  amassed 
a  fortune  of  fifty  million  dollars;  if  this  accumulation  was  not  ac- 
companied by  an  increase  of  the  country's  wealth;  and  if  it  did  not 
consist  of  money  hoards  but  of  useful  capital,  it  follows  that  his 
style  of  saving  belonged  to  the  Impairing,  not  to  the  hoarding  type. 
He  became  rich  at  'the  expense  of  others — by  means  of  a  "Change 
of  Possession"  of  property  already  existing. 

Considering  that  the  Capitalistic  type  of  saving  hardly  exists 
there  at  all,  and  that  the  hoarding  type  is  quite  limited  (for  the 
reason  just  stated),  and  considering  further  that  more  or  less  saving 
is  always  going  on  there,  it  follows  that  the  latter  must  be  princi- 
pally of  the  Impairing  type — a  fact  which  has  been  graphically  dem- 
onstrated in  Diagr.  3,  Which  see. 


Pros  and  Cons.  10i> 


savings  do  not  meet  an  outlet  in  the  CapitaP-Producing 
Form.  China's  poverty,  therefore,  must  be  primarily  at- 
tributed to  the  strong-  saving  disposition  of  its  people — 
thus  bearing  out  the  point  we  started  with,  that  nations 
of  great  saving  propensity  are  not  the  wealthiest.  Were 
the  people  of  China  less  inclined  to  save,  or  were  the 
savings  invested  in  new  productive  enterprises,  there 
would  be  more  business  and  less  poverty. 

In  contrast  with  the  example  of  China  we  find  much 
less  of  a  saving  propensity  in  England  and  the  United 
States,  but  on  the  other  hand  a  far  more  rapid  accumula- 
tion and  a  much  higher  standard  of  life.  Here,  the  de- 
sire for  a  higher  standard  of  life  tends  to  create  a  greater 
demand  on  the  part  of  the  people ;  this  demand  stimulates 
production  and  therewith  the  formation  of  new  produc- 
tive capital;  this,  again,  affords  opportunities  for  the 
capitalistic  investment  of  savings — which  means  real  ac- 
cumulation and  increase  of  wealth.  So  the  greater  ac- 
cumulating power  practically  depends  upon  a  concurrent 
growth  of  the  buying  proclivity  of  the  people.  It  would 
not  exist,  were  this  buying  proclivity  curtailed  by  a 
stronger  saving  propensity. 

Were  the  degree  of  saving  propensity  really  the  decid- 
ing factor  in  the  accumulation  of  wealth,  then  the  Dutch 
should  be  richer  than  the  French,  but  they  are  not;  and 
they  should  accumulate  wealth  much  faster  than  the 
Americans,  but  such  is  not  the  case. 

From  these  comparisons  it  follows  that  the  greatest 
degree  of  wealth  is  not  found  in  conjunction  with  the 
highest  degree  of  saving  propensity,  but  that  best  results 
as  to  actual  accumulation  are  attained  by  a  judicious 
mixture  of  a  saving  disposition  on  the  one  hand  and  a 
desire  for  a  better  style  of  living  on  the  other. 

This  desire  for  a  more  luxurious  style  of  living,  this 
toning  down,  as  it  were,  of  the  saving  activity,  is  the  in- 


106  Pros  and  Cons, 


dispensable,  and  in  reality  the  decisive  factor  required  to 
ensure  prosperous  business  conditions.* 

OBJECTION  NO.  5.— The  Impair  Savings  Theory,  in 
so  far  as  it  implies  that  not  all  of  the  savings  can  find 
useful  investment,  is  contradicted  by  the  fact  that  at  all 
times  cash  funds  will  command  interest  in  the  open  mar- 
ket. Business  men  would  not  oii'er  interest  if  they  had  no 
need  of  the  funds.  The  principal  use,  and  practically  the 
only  use,  which  they  make  of  such  funds  is  to  apply  them, 
directly  or  indirectly,  to  purposes  of  production;  and 
inasmuch  as  they  can  always  apply  them  to  that  purpose, 
it  follows  that  the  opportunities  for  profitable  investment 
in  production,  or  in  the  capital-producing  line,  are  prac- 
tically unlimited.  What  is  said  here  of  cash  funds  in 
general  will  equally  apply  to  such  funds  as  accrue  from 
savings.  In  other  words,  the  fact  that  savings  funds  will 
always  command  interest  goes  to  prove  that  there  is  no 
lack  of  opportunities  for  the  investment  of  savings  in 
the  lines  of  production  or  in  the  creation  of  productive 
capital. 

REPLY. — The  above  argument  is  based  on  the  as- 
sumption that  whenever  interest  is  offered  for  the  use  of 
cash  funds  the  borrower  does  this  for  the  purpose  of  some 
profitable  investment,  and  that  such  funds  as  accrue  from 
savings  are  usually  applied  in  that  direction.  As  a  mat- 
ter of  fact,  however,  loans  are  often  negotiated  under 
the  pressure  of  straitened  circumstances,  the  proceeds 
going  to  make  good  the  impairments  resulting  from  a 
shrinkage  of  income,  especially  at  times  of  depression. 
If  a  business  man  "runs  behind,"  he  often  has  to  resort 

*  It  should  be  understood,  however,  that  the  "judicious  mixture," 
referred  to  in  the  text,  is  not  the  only  requirement  necessary  to  en- 
sure prosperous  conditions.  It  may  be  jeopardized  by  an  unhealthy 
condition  of  the  foreign  trade  (seepage  135).  On  the  other  hand,  a 
favorable  trade  balance  (see  definition  on  page  135),  such  as  obtains 
with  the  French  (see  page  134)  and  with  the  Dutch,  will  do  much 
to  alleviate  the  ill  effects  of  an  excessive  saving  propensity.  The 
latter  would  have  tended  to  make  these  peoples  poorer,  had  they 
been  confined  to  the  home  markets  for  the  investment  of  their  sav- 
ings. The  favorable  trade  balance,  however,  allowed  them  to  partly 
invest  their  savings  abroad,  and  thus  made  them  all  the  more 
wealthy. 


Pros  and  Com.  107 


to  borrowing  to  cover  the  deficiency.  To  class  this  kind 
of  borrowing  the  same  as  borrowing  for  purposes  of  regu- 
lar business  or  for  purposes  of  enterprise  and  extension, 
would  be  improper. 

In  periods  of  depression  a  considerable  proportion  of 
the  demand  for  cash  funds  comes  from  the  source  here 
indicated.  As  at  such  times  the  saving  process  largely 
assumes  the  Impairing  Form,  so  that  every  $100  saved 
by  the  one  entails  a  loss  of  income  to  "  others r'  of  per- 
haps $500,  it  is  clear  that  among  those  "others"  there 
will  always  be  some  quite  eager  to  borrow  the  $100  ac- 
cumulated by  the  saver,  and  willing  to  pay  interest  for 
the  use  of  that  money.  And  what  is  true  of  the  individ- 
ual amount  of  $100  is  equally  true  of  the  grand  total  of 
all  Impair  Savings,  even  if  they  aggregate  a  billion  dol- 
lars per  annum.  So,  while  the  demand  for  cash  funds 
may  be  there,  this  does  not  prove  the  funds  to  be  wanted 
for  purposes  of  enterprise  or  of  new  constructions,  or 
of  profitable  investment. 

If  the  mere  fact  that  interest  is  being  paid  on  loans 
were  really  indicative  of  business  enterprise  and  prog- 
w<?  should  expect  to  find  a  very  low  rate  of  interest 
in  an  unpro^ressive  country  like  China,  where  but  little 
money  is  absorbed  in  enterprise  and  new  constructions 
Actually,  however,  the  rate  of  interest  is  very  high  there 
— as  much  as  three  per  cent,  per  month  not  being  un 
usual. 

OBJECTION  NO.  6.— In  contradistinction  to  the  view 
set  forth  in  "Objection  Xo.  5''  many  economists  hold 
that  at  times  of  depression  savings  funds,  and  cash  funds 
in  general,  do  not  find  ready  employment  in  new  enter- 
prises or  in  the  lines  of  regular  business.  Their  argu- 
ment would  run  as  follows:  The  palpable  decline  in  the 
rate  of  interest  clearly  indicates  an  accumulation  of  idle 
cash  funds,  although  the  statistics  of  the  banks  and  of 
other  financial  institutions  mav  not  reveal  the  full  extent 


108  Pros  and  Cons. 


of  the  accumulations.  If,  as  assumed  in  this  treatise, 
cash  funds  (savings  funds)  can  always  find  investment  in 
the  Impairing  Form  where  they  do  not  find  it  in  the 
Capitalistic,  there  should  be  no  accumulation  in  the 
money  market  and  therefore  no  decline  in  the  rate  of 
interest. 

REPLY. — It  is  true  that  savings  funds  if  not  finding 
investment  in  the  Capitalistic  Form  will  find  it  in  the 
Impairing  Form ;  but  not  so  readily.  The  opportunities 
for  investment  are  not  so  inviting.  Nobody  likes  to  lend 
money  where  it  is  to  be  used  for  covering  up  deficiencies. 
Even  where  property  is  for  sale,  like  houses,  factories, 
etc.,  and  where  it  is  offered  at  prices  much  below  the  nor- 
mal, buyers  hesitate  to  invest  in  the  face  of  a  stagnant 
or  declining  market.  This  hesitancy  impresses  itself 
upon  the  money  market — we  find  a  predilection  for 
sound  and  safe  investments,  and  a  disposition  to  be  satis- 
fied with  a  low  rate  of  interest  rather  than  to  run  any 
risk. 

At  prosperous  times  a  man  may  find  investment  for 
his  funds  in  two  ways,  first,  in  new  enterprises;  second, 
in  the  purchase  of  property  already  existing.  At  times 
of  depression  the  mode  of  investment  first  mentioned  is 
greatly  restricted  and  moneyed  men  will  have  to  look 
chiefly  to  the  other  form:  high-grade  securities  which 
yield  a  fixed  return  being  especially  in  demand.  This 
will  tend  to  enhance  the  prices  of  such  securities — mean- 
ing a  fall  in  the  rate  of  interest  which  the  funds  so  in- 
vested will  bring. 

A  falling  rate  of  interest,  therefore,  does  not  confirm 
the  conclusion  arrived  at  by  many  economists  as  to  its 
indicating  the  existence  of  huge  idle  cash  funds  in  the 
money  market  in  excess  of  the  comparatively  small 
amounts  revealed  by  statistics. 

OBJECTION  NO.  7.— The  demand  for  working 
forces  should  not  be  measured  altogether  by  dollars  and 


Pros  and  Cons.  109 


cents,  as  has  been  done  on  page  98,  and  all  through  this 
treatise.  A  thousand  dollars  expended  for  luxuries  will 
not  give  rise  to  an  equally  large  demand  for  working 
forces  as  $1,000  expended  for  common  necessaries,  the 
production  of  the  latter  generally  requiring  much  more 
manual  labor.  So  the  gauge  used  for  measuring  the  re- 
lations between  demand  and  supply  does  not  seem 
reliable. 

REPLY. — Inasmuch  as  the  demand  for  luxuries  will 
of  itself  include,  or  at  least  lead  to,  a  demand  for  com- 
mon necessaries  (as  fully  explained  on  page  69),  the 
deductions  drawn  in  the  foregoing  objection  are  not  well 
founded. 

On  the  whole  it  is  not  so  important  that  the  savings 
funds  should,  by  the  act  of  their  investment,  put  the 
greatest  possible  number  of  men  in  activity,  as  that  the 
funds  be  transformed  from  idle  Surplus  Funds  into 
Active  Money:  in  terms  of  the  Chart:  That  they  be 
transferred  £rom  the  unproductive  circulation  of  the 
black  central  field  into  the  channels  of  industry  and  trade 
represented  by  the  red  ring.  So  long  as  they  circulate  in 
these  channels,  the  purchases  of  the  one  mean  income 
and  business  for  the  other,  no  matter  whether  the  ex- 
penditures be  made  for  luxuries  or  for  necessaries. 

OBJECTION  NO.  8.— No  attention  has  been  paid,  in 
this  treatise,  to  in  important  economic  principle  inti- 
mately connected  with  the  subject  of  demand  and  supply, 
namely,  the  fact  that  a  demand  for  commodities  primarily 
concerns  and  rewards  past  labor,  such  as  was  previously 
required  in  producing  the  commodities — whereas  the 
author  treats  the  subject  of  demand  entirely  in  its  bear- 
ing upon  future  production.  As  the  future  is  wholly  an 
outgrowth  of  the  past,  reliable  conclusions  can  hardly  be 
reached  where  the  part  played  by  the  past  is  not  con- 
sidered. 

REPLY. — Hundreds  of  volumes  have  been  written  to 
define  the  relations  of  present  demand  to  past  labor  or 


110  Pros  and  Cons. 


enterprise.  Such  discussions  may  have  their  theoretical 
value  but  are  of  no  practical  avail  and  would  throw  no 
additional  light  on  the  ''neglected  point"  considered  in 
this  treatise. 

OBJECTION  NO.  9.— The  impoverishment  of  indi- 
viduals and  the  consequent  alienation  of  property  has,  in 
this  treatise,  been  ascribed  principally  to  the  saving  ac- 
tivity of  ''others."  In  most  cases,  however,  the  impover- 
ishment, especially  on  the  part  of  the  wealthy,  can  be 
traced  to  personal  causes.  A  man  may  run  behind  in  his 
affairs,  because  he  is  hampered  by  ill-health,  or  by  acci- 
dents, or  because  he  lacks  judgment  in  the  management 
of  his  estate,  or  goes  into  losing  enterprises,  or  lives  too 
high,  sacrificing  his  future  well-being  for  the  sake  of 
temporary  passions  and  enjoyments.  Whenever  the 
wealthy  spend  more  than  their  income  amounts  to,  their 
subsequent  impoverishment  is  not  due  to  the  saving 
activity  of  others,  but  to  what  may  properly  be  classed 
as  squandering. 

REPLY. — No  doubt  the  impoverishment  of  wealthy 
individuals  is  often  caused  by  their  own  doings.  Were 
we  to  ascribe  to  this  cause,  however,  the  widespread  im- 
poverishment observable  at  times  of  depression,  we 
might,  with  as  much  reason,  also  ascribe  the  high  degree 
of  unemployment,  observable  at  such  times,  to  individual 
causes.  The  fact  that  unemployment  often  can  be  traced 
to  special  circumstances  of  an  individual  character  re- 
mains undisputed.  A  workingman  may  be  disabled  by 
sickness  or  accident,  or  he  may  not  attend  to  his  duties, 
or  be  quarrelsome,  or  negligent,  or  lazy,  or  intemperate, 
and  owing  to  any  of  such  reasons  he  may  lose  his  em- 
ployment. Nevertheless  nobody  will  deny  that  if  at  times 
of  dull  business  large  numbers  of  men  are  thrown  out  of 
work,  there  are  general  and  not  individual  causes  at  play. 
Just  so  with  the  impoverishment  of  the  wealthy.  While 
sporadic  cases  of  "running  behind"  may  often  be  due  to 
squandering,  the  far-reaching  impoverishment  observable 


Pro*  and  Cons.  Ill 


at  times  of  depression  is  evidently  due  to  general,  not  to 
personal  causes,  and  it  would  be  improper  to  maintain 
that  the  losers  come  to  grief  entirely  by  their  own  fault. 


A  sharp  distinction,  therefore,  should  be  made  con- 
cerning the  two  factors  to  which  the  impoverishment  of 
individuals  may  be  due,  whether  to  Squandering,  or  to 
Impair  Savings  on  the  part  of  others.  These  two  factors 
are  very  different  in  their  nature  and  very  different  in 
their  manner  of  action,  and  especially  so  in  their  bearing 
upon  business  and  upon  supply  and  demand;  the  one 
factor  stimulating  the  demand  without  increasing  the 
supply;  the  other  stimulating  the  supply  without  in- 
creasing the  demand.  A  spendthrift  who  wastes  his  es- 
tate in  the  purchase  of  commodities  or  personal  services 
evidently  brings  more  demand  than  supply  into  the  mar- 
ket, and  thus  enlivens  business.  A  saver  brings  in  more 
supply  than  demand,  primarily  at  least,  as  is  well  under- 
stood; and  if  subsequently  his  savings  lead  to  Impair 
Investments,  the  act  of  investment  brings  no  demand 
whatever  upon  the  market,  thus  leaving  an  excess  of  the 
supply.  Considering  that  this  shortage  of  the  demand, 
as  well  as  the  unemployment  resulting  therefrom,  pos- 
sesses an  inherent  tendency  to  multiply,  as  explained  on 
page  43,  and  considering  further  that  these  two  elements 
form  the  very  essence  of  dull  business  and  of  depression, 
it  is  evident  that  the  factor  which  ushers  in  these 
maleficent  elements  will  hurt  business  and  the  welfare  of 
the  community  far  more  than  the  squandering  process 
will. 

Much  has  been  made  of  the  point  that  a  squanderer 
destroys  wealth,  inasmuch  as  he  annihilates  some  of  the 
country's  capital  and  wastes  the  fruits  of  other  people's 
labor — this  being  considered  equally  injurious  to  the 
country's  welfare  as  the  destruction  of  property  by  con- 


112  Pros  and  Cons. 


flagration,  floods,  etc.  We  should  bear  in  mind,  however, 
that,  while  the  loss  of  a  house  by  fire  will  actually  des- 
troy the  house,  and  reduce  the  country's  wealth  accord- 
ingly, the  loss  of  the  house  by  the  act  of  squandering  will 
do  nothing  of  the  kind ;  it  will  merely  lead  to  a  change  of 
ownership,  leaving  the  property  itself  intact.  There  may 
be  some  truth  in  the  further  assertion  that  the  spendthrift 
wastes  the  fruits  of  other  people's  labor,  inasmuch  as  he 
lavishly  buys  and  consumes  all  sorts  of  commodities, 
especially  luxuries.  But  the  fact  is,  commodities  are 
there  to  be  consumed ;  i.  e.,  to  be  destroyed  or  absorbed 
by  use  or  consumption.  A  rich  man,  although  living 
within  his  means,  may  use  and  consume  commodities  to 
a  much  larger  extent  than  the  spendthrift  does,  without 
being  accused  of  wasting  the  fruits  of  other  people's 
labor — and  if  his  purchases  do  not  constitute  a  waste  of 
the  country's  wealth,  why  should  those  of  the  squan- 
derer? Were  there  a  dearth  of  commodities,  and  not 
enough  in  the  market  to  meet  the  demand,  then  the 
wasteful  consumption  of  the  spendthrift  (and  in  fact 
also  of  the  rich)  would  leave  others  short  of  an  adequate 
supply  of  such  commodities  as  they  really  need ;  but 
where  (under  normal  conditions)  our  markets  are  over- 
flowing, and  legions  of  workingmen  stand  ready  to  sup- 
ply still  more,  if  the  demand  existed,  and  where,  on  the 
other  hand,  the  prodigality  of  the  spendthrift  helps  to 
augment  the  demand  for  commodities  and  for  working- 
men,  it  seems  entirely  out  of  place  to  construe  his  lavish- 
ness  as  leading  to  an  impairment  of  the  country's  wealth. 
Of  course,  all  this  is  true  only  within  reasonable  lim- 
its. If  the  squandering  tendency  should  spread  to  a  con- 
siderable extent,  the  money  market  may  be  unfavorably 
affected,  such  cash  funds  as  are  needed  for  enterprises 
and  new  constructions  then  being  absorbed  by  dissipa- 
tions, with  a  resultant  dearth  of  cash  capital.  It  may  be 


Pros  and  Cons.  113 


difficult,  however,  to  cite  a  single  instance  where  a  gen- 
eral dearth  of  cash  funds  was  traceable  to  excessive 
squandering,  and  not  to  the  great  demand  for  purposes 
of  enterprise  and  new  constructions.  So  long  as  we  find 
an  ample  supply  of  available  cash  funds  (as  is  the  case 
under  normal  conditions),  the  doings  of  the  spendthrift 
will  exercise  no  perceptible  influence  on  the  money  mar- 
ket; and  especially  not  at  times  of  depression,  when  a 
lack  of  cash  funds  is  hardly  ever  witnessed. 

On  general  principles  squandering  is  not  commenda- 
ble, for  it  hurts  the  individual  concerned,  and  obviously 
it  would  be  better  that  all  citizens  should  live  in  comfort- 
able circumstances  rather  than  to  have  any  of  them  re- 
duced to  poverty.  But  the  contention  that  it  destroyes 
wealth  and  wastes  the  fruits  of  other  people's  labor  and 
that  it  depletes  the  money  market  to  an  undue  extent — 
all  this  is  based  more  upon  fiction  than  upon  facts. 

OBJECTION  NO.  10. — The  author  considers  only 
two  forms  of  investment,  the  Capitalistic  and  the  Impair- 
ing; and  maintains  that  savings,  in  order  to  find  invest- 
ment, are  confined  to  one  of  these  two  forms.  There  are 
other  ways,  however,  for  employing  savings  or  cash 
funds;  for  instance,  by  loaning  them  out  to  merchants, 
manufacturers,  and  others,  who  make  use  of  them  in  the 
regular  course  of  their  business. 

REPLY. — Let  us  follow  up  the  various  purposes  for 
which  a  merchant  may  secure  a  loan,  say  of  $1,000.  First, 
he  may  intend  to  increase  his  business;  then  the  loan 
would  constitute  an  investment  of  the  Capitalistic  class. 
Second,  he  may  have  run  behind,  thus  needing  the  money 
to  make  up  for  his  losses ;  then  the  loan  would  constitute 
an  investment  of  the  Impairing  class.  Third,  he  may 
borrow  the  $1,000  to  pay  oft*  another  loan — in  which  case 
there  has  been  no  investment  of  cash  funds  at  all,  the 
$1,000  merely  changing  ownership  when  being  paid  over 
to  cancel  the  old  loan,  thus  remaining  "investment- 


114  Pros  and  Cons. 


seeking"  cash  capital,  though  in  the  hands  of  a  new 
owner.  Fourth,  he  may  need  the  money  for  temporary 
purposes,  to  bridge  over  the  busy  season — which  would 
practically  mean  an  increase  of  his  business,  the  same  as 
just  considered  under  point  No.  1,  only  of  a  temporary 
character.  Whichever  way  we  take  it,  we  would  find 
that  the  funds,  if  they  really  meet  investment  (and  not 
merely  shift  ownership),  will  find  it  either  in  the  Capital- 
istic or  in  the  Impairing  Form. 

Just  so  with  the  alleged  "other  ways"  of  employing 
funds.  So  long  as  savings,  or  cash  funds,  are  actually 
available  for  investment,  and  are  not  needed  for  Replace- 
ment purposes  (represented  by  Lines  12,  13  and  14  of  the 
Chart),  they  practically  have  only  two  avenues  of  invest- 
ment before  them,  either  the  Capitalistic,  indicated  by 
Lines  15  and  16  of  the  Chart,  or  the  Impairing,  indicated 
by  Line  17. 

If  needed  for  "Replacement  purposes  (Lines  12,  13  and 
34)  they  are  not  available  for  investment,  and  therefore 
would  not  fall  within  the  range  of  if  Objection  No.  10. " 

OBJECTION  NO.  11.— The  amount  of  three  billion 
dollars  assumed  in  this  treatise  as  representing  our  coun- 
try's saving  power,  is  much  too  large.  While,  as  a  rule, 
economists  are  cautious  about  naming  a  definite  figure 
as  representing,  even  conjecturally,  a  country's  saving 
power,  where  there  is  so  little  material  on  which  to  base 
statistics,  the  majority  of  them  will  hardly  feel  inclined 
to  admit  more  than  one-half  or  one-quarter  of  that 
amount.  The  smaller  its  aggregate,  the  less  its  import- 
ance as  an  economic  factor. 

REPLY. — To  some  extent  the  data  given  by  the  cen- 
sus reports,  indicating  a  steady  increase  of  the  country's 
wealth,  should  be  a  guide.  Even  though  these  reports 
may  contain  many  errors  and  irregularities,  they  ought 
to  be  fairly  correct  on  the  average,  and  when  comparing 
the  successive  reports  with  each  other  they  agree  well 


Pros  and  Cons.  115 


enough  to  merit  confidence.  And  they  undoubtedly  point 
to  the  larger  figure  rather  than  to  the  smaller  one,  not- 
withstanding the  fact  that  some  of  the  increase  repre- 
sents mere  appreciation  in  market  value  which  has  noth- 
ing to  do  with  the  saving  process.  Take,  for  instance,  the 
decade  from  1880  to  1890.  This  period  certainly  was  not 
characterized  by  an  inflation  of  market  values.  Still  our 
country's  wealth  increased  from  43  billion  dollars  in  1880 
to  65  billions  in  1890,  showing  an  annual  augmentation  of 
over  two  billions,  in  the  shape  of  actual,  tangible  prop- 
erty, no  paper  values  included.  This  increment  of  wealth 
represents  saving  power  to  the  like  amount,  excepting  a 
few  items  which  in  their  aggregate  do  not  make  up  a 
large  share  of  the  total.*  In  1890  the  saving  power  was 
greater  than  in  1880,  and  hardly  less  than  two  billions 
per  annum.  For  the  boom  period  of  1905,  1906  and  1907 
where  the  country's  population,  earning  power  and  re- 
sources had  wonderfully  increased,  the  assumption  of  an 
amount  like  three  billions  annually  does  not  seem  out  of 
place. 

Another  guide  may  be  found  in  the  extent  of  the  an- 
nual issue  of  new  securities.  According  to  the  compila- 
tions of  the  New  York  Journal  of  Commerce  the  total  of 
the  issues  "authorized"  for  the  first  nine  months  of  1907 
came  to  1733  million  dollars,  and  the  total  of  the  secur- 
ities really  issued  during  that  period  to  1025  millions — 
of  which  amount  about  one-third  has  been  estimated  to 
represent  mere  refunding  or  conversion  operations,  the 
remaining  two-thirds  constituting  new  capital  such  as 

*  These  items  principally  consist  of  the  following:  first,  the  small 
appreciation  in  the  market  value  of  the  property  existing-  prior  to 
1880;  second,  the  property  built  up  with  funds  procured  by  the  ex- 
pansion of  credit  money,  i.  e.,  bank  notes  and  bank  credits  (bank 
loans,  "money  in  bank"),  which  funds  do  not  represent  savings; 
third,  our  borrowings  abroad,  represented  by  the  growth  of  foreign 
indebtedness,  the  latter  being  no  more  than  one  billion  at  the  ut- 
most, for  the  whole  decade.  All  of  these  items  may  not  foot  up  more 
than  a  quarter  of  the  total  increase  of  tangible  wealth  reported  by 
the  census;  perhaps  not  more  than  a  sixth. 


116  Pros  and  Cons. 


will  absorb  the  funds  of  the  money  market  and  which 
must  be  supplied  principally  by  the  saving  process.  Fig- 
uring a  full  year  instead  of  nine  months,  the  total  may 
come  up  to  900  millions.*  This  figure,  large  as  it  is,  com- 
prises only  the  issues  of  railroads  and  of  industrial  com- 
panies where  each  issue  reaches  a  million  dollars  or  more. 
Considering  that  the  great  majority  of  issues  consist  of 
amounts  of  less  than  a  million ;  considering  further  that 
many  other  large  corporation  issues  are  made  in  the  min- 
ing, navigation,  banking  and  commercial  lines — the  said 
annual  increase  of  nine  hundred  millions  ought  to  swell 
considerably.  The  municipalities  alone  borrowed  200 
millions  from  January  to  September,  1907.  Bearing  fur- 
ther in  mind  that  all  wealth  in  the  United  States  owned 
by  corporations  has  been  estimated  at  35  billions,  or  one- 
third  of  tho  country's  aggregate,  and  knowing  that  not 
only  corporate  weaJth  is  increasing  but  also  that  much 
larger  share  which  is  held  by  individuals,  such  as  we  find 
in  the  lines  of  agriculture,  commerce  and  industry  and  in 
the  possession  of  all  employed  persons — it  seems  proper 
to  put  down  the  present  annual  increase  of  capital  and 
wealth  at  not  less  than  four  billion  dollars,  the  bulk  of 
this  representing  saving  power. 

American  economists  have  not  paid  much  attention  to 
the  great  extent  of  our  country's  annual  increment  of 
capital.  A  prominent  French  economist,  however,  has 
estimated  the  latter  to  come  to  2,000  or  2,500  million  dol- 
lars per  annum  at  the  present  time.j  Suppose  the  saving 

*  For  the  full  year  of  1906  the  railroads  alone  show  an  increase 
of  capitalization  (bonds,  stocks,  etc.)  of  about  $800,000,000. 

t  Strange  to  say,  while  computing  our  country's  annual  capital 
requirement  at  2,000  to  2,500  million  dollars,  that  French  economist 
puts  the  saving  power  at  only  600  millions — holding  that  the  balance 
must  be  procured  from  abroad.  A  strange  idea,  indeed,  revealing 
a  considerable  degree  of  confusion  as  to  the  source  of  capital.  If 
we  had  to  borrow  from  1,400  to  1,900  millions  from  Europe  in  a  single 
year,  where  would  we  come  to  in  course  of  time?  Our  total  indebt- 
edness to  Europe,  accumulating  for  the  whole  of  the  last  century, 
has  never  been  estimated  higher  than  2,500  millions! 

Again,  in  what  shape  could  such  a  huge  amount  of  capital,  a 
billion  or  more,  be  transferred  from  Europe  to  America?  In  the  form 


Pros  and  Cons.  117 


power  were  only  that  much.  And  suppose  that  at  a  time 
of  depression  one-third  of  that  amount  of  savings  were 
unable  to  find  investment  in  the  beneficent  Capitalistic 
Form ;  as  it  were,  that  savings  funds  to  the  extent  of  750 
millions  had  to  find  investment  in  the  Impairing  Form; 
this  would  mean  a  direct  impairment  of  income  on  the 
part  of  the  people  to  the  same  extent.  But  by  the  step- 
ping in  of  the  Multiplying  Principle,  as  explained  on 
page  43,  that  amount  may  be  augmented  fivefold,  or 
more,  and  thus  may  fully  account  for  the  -extensive  loss 
of  income  which  we  witness  during  depressions.  Conse- 
quently, it  would  not  prove  much  against  my  theory  if 
instead  of  three  billions,  the  country's  annual  saving 

of  merchandise — where  statistics  show  the  reverse,  a  large  excess  not 
of  imports  but  of  exports?  Or  in  the  form  of  money?  I  have  shown 
on  page  29  that  either  form  is  out  of  the  question  for  effecting  a 
transfer  of  such  magnitude.  Can  it  be  done  by  the  mere  instru- 
mentality of  foreign  exchange?  According  to  prevailing  views,  yes. 
Suppose  a  New  York  banker,  A,  negotiates  a  loan  of  a  million  dollars 
with  a  bank  in  Paris;  the  latter  telegraphs  Morgan  &  Co.  in  New 
York  to  pay  that  amount  to  A;  all  this  may  be  done  within  a  few 
hours,  and  the  transfer  is  apparently  consummated. 

But  is  it  really  consummated?  Does  not  the  payment  merely 
represent  part  of  the  transaction?  The  mere  shifting  of  funds  from 
one  New  York  banker  to  another  New  York  banker — funds  which 
were  already  in  New  York,  either  in  the  possession  of  Morgan  or 
of  Morgan's  bank — that  does  not  end  the  matter.  The  real  transfer, 
from  Paris  to  New  York,  will  be  made  when  Morgan  and  the  Paris 
bank  come  to  settle  with  each  other.  Then  it  turns  out  that  .unless 
foreign  trade  (understood  in  its  broad  sense,  see  page  135)  leaves  a 
balance  to  allow  of  such  exchange  transactions,  the  latter  must  be 
made  good  by  means  of  gold  shipments.  To  presume  that  over  and 
above  the  limit  drawn  by  the  trade  balance  an  amount  like  a  billion 
dollars,  or  even  the  tenth  part  of  it,  can  be  transferred  by  mere  ex- 
change transactions  would  be  preposterous. 

Nor  can  new  capital  be  procured  by  withdrawing  it  from  old  In- 
vestments, though  many  believe  it  can.  Suppose  a  man  has  in- 
vested his  capital  of  $100,000  in  building  a  factory  and  that  he  needs 
$10,000  additional  cash  for  going  into  some  new  enterprise.  Can  he 
withdraw  this  money  from  his  factory?  No.  He  may  mortgage  the 
latter  and  thus  raise  the  $10,000;  then  the  new  capital  comes  from 
the  lender  of  the  money,  not  from  the  factory.  Or  he  may  obtain  the 
$10,000  out  of  the  profits  accruing  from  running  it;  in  this  case  the 
money  comes  from  his  earnings  and  from  what  he  saves  out  of  the 
latter,  but  is  not  withdrawn  from  the  capital  originally  invested  in 
the  factory. 

As  a  matter  of  fact  the  cash  capital  required  for  building  fac- 
tories, railroads  and  other  productive  capital  must  be  supplied  by 
the  saving  process,  excepting  only  the  funds  coming  from  the 
expansion  of  credit  money  and  those  derived  from  abroad  (see  foot- 
note on  page  115). 

I  have  dwelt  on  these  subjects  at  some  length  because  consider- 
able misconception  seems  to  prpvail  as  to  the  source  of  capital,  not 
only  on  the  part  of  the  economist  referred  to,  but  of  others  as  well. 


118  Pros  and  Cons. 


power  were  only  hall  that  sum,  or  still  less ;  and  whether 
the  Impair  Savings  come  to  a  billion  dollars  or  only  to 
half  that  nmeh.  Either  sum  may  be  swelled  to  a  very 
large  total  by  the  intervention  of  the  Multiplying  Prin- 
ciple, and  may  thus  become  an  economic  factor  of  suffi- 
cient importance  to  fully  account  for  the  phenomena 
which  we  witness  in  times  of  depression. 

OBJECTION  NO.  12.— The  Impair  Savings  Theory  is 
built  up  on  two  assumptions,  first,  that  an  excess  of  sav- 
ings, over  and  above  what  the  author  styles  "Capitalistic 
Savings,"  really  exists;  second,  that  these  Excess  Sav- 
ings work  injury  to  the  community  and  thus  become 
Impair  Savings.  The  existence  of  such  "Excess  Sav- 
ings" is  open  to  question,  so  long  as  not  substantiated 
by  statistical  material.  Indeed,  some  economists  believe 
that  savings  can  almost  always  find  investment  in  enter- 
prise and  new  constructions  and  that,  if  at  times  of  de- 
pression a  lull  in  new  constructions  takes  place,  this  is 
due  to  a  lack  of  savings  funds,  not  to  a  lack  of  opportun- 
ities for  the  "Capitalistic"  kind  of  investment.  If  so, 
there  could  be  no  Excess  Savings,  and  without  these  there 
can  be  no  Impair  Savings.  Unless  the  existence  of 
"Excess  Savings"  be  fully  established,  the  Impair  Sav- 
ings Theory  has  no  real  foundation. 

REPLY.— Though  it  may  be  difficult  to  produce  statis- 
tical material  bearing  on  the  subject,  still  the  existence  of 
Excess  Savings  can  be  proved  by  a  chain  of  definite  facts, 
as  follows: 

PROOF  POINT  1.— At  present,  during  the  depression 
of  1908,  many  individuals  and  business  firms  are  "run- 
ning behind,"  expending  more  money  for  their  current 
expenses  than  they  earn;  this  "running  behind"  being 
caused,  not  by  extravagance,  but  by  a  shrinkage  of  their 
income,  and  this  shrinkage,  in  turn,  being  due  to  lack  of 
employment  resulting  from  general  market  conditions. 
For  example,  the  Erie  Railroad  is  "running  behind"  at 
the  rate  of  much  over  a  million  dollars  per  annum,  where 
before  the  panic  it  earned  a  surplus. 


Pros  and  Con*.  119 


PROOF  POINT  2.— Suppose  these  "  Excess  Expendi- 
tures" amount  to  a  billion  dollars  (or  any  other  sum)  to 
which  extent  the  said  individuals  or  concerns — let  us  call 
them  "The  Impaired ' '—  are  getting  poorer.  If  The  Im- 
paired consume  a  billion  dollars'  worth  of  commodities 
(or  services)  more  than  they  produce,,  there  must  be 
others  in  the  community,  savers,  who  produce  a  billion 
dollars'  worth  of  commodities  in  excess  of  what  they 
consume.  Either  this,  or  the  stock  of  commodities,  kept 
en  hand  by  the  dealers,  must  run  down;  but  as  we  had  no 
accumulations  of  stock  before  the  panic;  and  as  at  pres- 
ent (summer  months  of  1908)  stocks  everywhere  have 
already  run  down  to  a  minimum;  any  further  shrinkage 
of  the  stock  of  commodities  is  practically  impossible,  so 
the  fact  remains  that  any  further  Excess  Expenditures 
on  the  part  of  The  Impaired  indicate  an  equivalent 
amount  of  savings  on  the  part  of  others.  These  savings 
represent  what  I  have  styled  "Excess  Savings." 

PROOF  POINT  3.— If  The  Impaired  expend  more 
money  than  they  earn,  how  do  they  obtain  the  money? 

It  comes  from  the  savers,  and  reaches  them  over  the 
bridge  of  their  own  impoverishment,  either  in  the  shape 
of  loans,  or  in  payment  for  property  which  they  have  to 
alienate.  Suppose  some  of  The  Impaired  be  workingmen, 
unemployed,  who  draw  on  their  deposits  in  the  savings 
bank ;  the  latter,  in  order  to  procure  the  money,  will  have 
to  sell  some  of  its  securities ;  and  if  the  savers  mentioned 
in  Point  2  buy  these  securities,  their  savings  funds  come 
into  possession  of  the  unemployed  workingmen — not  in 
the  shape  of  income  but  in  payment  for  the  securities 
alienated  by  them  (or  by  their  bank).  If  instead  of  the 
unemployed  workingmen  we  consider  the  case  of  a  busi- 
ness concern,  say,  the  Erie  Railroad,  we  find  here,  too, 
that  the  money  the  Railroad  expends  in  excess  of  its 
income  must  come  from  others;  presumably  in  the  shape 


120  Pros  and  Cons. 


of  loans:  or  by  leaving  accounts  unpaid,  which  amounts 
to  the  same  thing  as  contracting  loans  or  debts. 

Whether  the  billion  dollars  consumed  in  Excess  Ex- 
penditures conies,  directly  or  indirectly,  from  the  billion 
of  Excess  Savings  referred  to  in  Point  2 ;  or  whether 
some  of  these  savings  funds  stay  in  the  money  market, 
and  other  funds,  already  in  the  money  market,  go  to  The 
Impaired  to  pay  for  their  Excess  Expenditures,  that  is 
immaterial.  Practically  we  are  justified  in  saying  that 
the  billion  of  Excess  Savings,  accumulated  by  the  savers, 
find  their  investment  by  providing  for  the  Excess  Expen- 
ditures of  The  Impaired — to  whom  the  money  goes,  not 
in  the  shape  of  income,  but  over  the  bridge  of  their  own 
impoverishment. 

PROOF  POINT  4.— The  Excess  Savings  referred  to 
in  Point  2  (represented  by  Line  11C  of  the  Chart,  see 
also  Diagram  2)  are  made  in  addition  to  the  Capitalistic 
Savings  (Line  11B)  and  are  by  no  means  identical  with 
these.  The  latter,  when  invested,  are  expended  for  new 
constructions,  and  go  to  the  working  forces  in  the  shape 
of  income,  for  services  rendered.  They  neither  cause 
unemplojanent,  nor  do  they  go  to  the  unemployed,  or  to 
The  Impaired. 

PROOF  POINT  5.— If  no  Excess  Savings  were  made ; 
if  that  billion  of  dollars  referred  to  in  Point  2  were  not 
accumulated  in  the  shape  of  savings  but  were  spent  by 
the  owners  for  luxuries,  that  billion  would  go  to  the 
working  forces  in  the  shape  of  income,  for  services  ren- 
dered. Then  the  class  of  The  Impaired  would  disappear. 
There  would  be  no  Excess  Expenditures,  due  to  general 
market  conditions,  for  people  would  earn  the  money  they 
expend.  There  would  be  an  equilibrium  between  the  de- 
mand for  working  forces  "and  the  supply  thereof,  and  the 
depression  would  cease.  It  may  not  be  apparent  how  an 
enlarged  demand  for  luxuries  will  benefit  all  of  the  work- 


Pros  and  Cons.  121 


ing  forces,  now  wholly  or  partly  idle;  for  instance,  what 
advantage  the  Erie  Railroad  would  derive  therefrom.  But 
the  manufacturers  of  luxuries,  when  expending  their 
earnings,  would  set  other  working  forces  in  motion  and 
this,  owing  to  the  well-known  law  of  action  and  reaction, 
would  react  favorably  upon  all  working  forces  in  the 
community,  including  the  Erie  Railroad. 
»*****»• 

Granting  the  fundamental  point  of  the  foregoing 
argument,  namely,  that  Excess  Expenditures  (as  defined 
in  Proof  Point  1)  really  exist  at  times  of  depression — a 
point  which  economists  cannot  reasonably  dispute — the 
conclusion  follows,  with  absolute  certainty,  that  Excess 
Savings  must  be  made  concurrently,  and  to  an  equivalent 
extent,  and  these  must  be  made  in  addition  to  the  "Capi- 
talistic" and  the  "Replacement"  Savings.  Excess 
Expenditures  on  the  part  of  some,  and  Excess  Savings 
on  the  part  of  others,  go  hand  in  hand,  inseparably.  And 
of  these  two  elements  the  latter  is  the  governing  one,  as 
shown  in  Proof  Point  5.  "Without  Excess  Savings  there 
wouJd  not  be  that  "lack  of  demand"  for  working  forces, 
nor  would  there  be  that  forced  "running  behind"  and 
impoverishment  on  the  part  of  "others."  The  fact  that 
Excess  Savings  lead  to  such  injurious  results,  gives  them 
their  character  as  Impair  Savings. 

»*»*•*•• 

In  addition  to  the  positive  proof  contained  in  the  fore- 
going argument  we  could  adduce  a  number  of  points  of 
circumstantial  evidence  showing  that  the  standpoint 
taken  in  Objection  No.  12  is  untenable.  Let  us  cite  some 
of  these  points,  as  follows: 

CIRCUMSTANTIAL  POINT  1.-  Though  some  of  our 
economists  may  share  the  view  evolved  in  Objection  12, 
that  thero  can  never  be  any  superfluity  of  savings,  the 


122  Pros  and  Cons. 


great  majority  of  them  agree  on  the  fact  that  more  sav- 
ings accrue  at  times  of  depression,  than  can  find  invest- 
ment in  enterprise  and  new  constructions,  for  the  time 
being.  They  arrived  at  this  conclusion,  not  through  mere 
bias,  but  after  duly  weighing  the  facts  and  circumstances 
bearing  on  the  matter.  In  other  words,  they  believe  that 
class  of  savings  to  exist  (temporarily  at  least)  which  I 
have  called  Excess  Savings. 

CIRCUMSTANTIAL  POINT  2.— Not  only  at  times 
of  depression  but  also  at  normal  times  many  investments 
are  continually  being  made  abroad,  even  where  the  secur- 
ity may  not  be  of  the  best;  for  instance  in  the  construc- 
tion of  railroads  in  China,  Turkey,  South  America, 
Africa,  etc.,  and,  particularly  on  the  part  of  the  French, 
in  the  constant  acquisition  of  foreign  securities.  This 
clearly  reveals  the  fact  that  the  opportunities  for  invest- 
ment at  home  do  not  keep  pace  with  the  increment  of 
cash  funds  and  that  the  latter  accrue  faster  than  they  can 
be  absorbed  and  employed  to  advantage  in  the  home 
market — thus  demonstrating  the  existence  of  an  excess 
of  savings. 

If,  then,  we  find  an  excess  of  savings  even  at  normal 
times,  we  should  not  doubt  their  presence  at  times  of  poor 
business,  considering  that  then  the  opportunities  for  the 
Capitalistic  Form  of  investment  are  becoming  quite 
scarce. 

CIRCUMSTANTIAL  POINT  3.-  In  countries  already 
well  developed  and  teeming  with  all  kinds  of  capital  in 
the  lines  of  industry,  agriculture,  transportation,  etc., 
there  should  be  more  production  of  commodities,  more  in- 
come on  the  part  of  the  citizens,  and  consequently  more 
saving  power  than  in  new  countries  undergoing  rapid 
development,  where,  owing  to  the  less  efficient  means  of 
production,  the  output  of  the  working  forces  can  not  be 


Pros  and  Cons.  123 


so  great.  Nevertheless  the  greater  saving  power  in  the 
old  country  does  not  produce  the  results  which  we  might 
expect  in  the  shape  of  accumulation  of  tangible  wealth, 
this  being  generally  larger  (per  capita)  in  the  new  coun- 
try. Thus  we  find,  in  the  well-developed  country,  a 
higher  degree  of  saving  power  coupled  with  a  smaller 
aggregate  of  the  fruits  of  saving — showing  clearly  that 
a  part  of  the  savings  must  find  investment  in  a  way  not 
leading  to  the  augmentation  of  wealth;  in  other  words, 
that  there  must  be  an  excess  of  savings — Impair  Sav- 
ings— due  to  the  lack  of  opportunities  for  Capitalistic 
Investment. 

CIRCUMSTANTIAL  POINT  4.— If  we  were  to  be 
governed  by  the  time-honored  proverb,  "By  their  fruits 
you  shall  know  them,"  we  would  have  to  conclude  that 
Impair  Savings  exist,  because  the  conditions  exist  which 
they  naturally  will  engender.  If  we  know  that  Impair 
Savings  will  cause  unemployment,  lack  of  demand,  and 
depression  in  trade,  and  if  at  times  we  find  precisely  these 
conditions  to  prevail  without  being  able  to  trace  them  to 
any  other  source  that  will  bear  investigation,  the  exist- 
ence of  Impair  Savings  seems  to  be  indubitably  proven. 


Let  us  recapitulate  the  conclusions  arrived  at  in  dis- 
cussing the  twelve  "Objections"  advanced  in  the  fore- 
going pages. 

FIRST. — Though  the  investment  of  savings  funds  will 
always  engender  a  demand,  this  need  not  necessarily  be 
a  demand  for  working  forces. 

SECOND. — Though  savings  funds,  in  the  course  of 
their  investment,  will  finally  be  expended  in  buying  com- 
modities, and  though  this  will,  in  turn,  create  a  demand 
for  working  forces,  such  demand  may  not  compensate  for 


124  Pros  and  Cons. 


the  primary  minus  originated  by  the  saving  activity.  A 
"lack  of  demand''  is  bound  to  result  if  the  act  of  invest- 
ment does  not  call  for  working  forces. 

THIRD.- -While  in  the  regular  course  of  business  pro- 
duction and  consumption  go  hand  in  hand,  the  producer 
being  also  a  consumer  (he  or  his  family),  such  is  not  the 
case  where  Impair  Savings  intervene.  There,  production 
and  consumption  are  no  longer  united,  and  we  find  on  the 
one  hand  working  forces  which  produce  without  con- 
suming, on  the  other  hand  such  as,  through  enforced 
idleness,  consume  without  producing. 

FOURTH. — The  nations  of  greatest  saving  propensity 
are  not  the  wealthiest.  Best  results  are  attained  by  a 
proper  mixture  of  saving  propensity  on  the  tme  hand  and 
a  disposition  for  the  enjoyment  of  wealth  on  the  other. 

FIFTH. — The  fact  that  savings  funds  (cash  funds) 
can  at  all  times  find  interest-bearing  investment  does  not 
prove  that  by  such  investment  the  funds  are  absorbed  in 
enterprise  and  new  constructions,  or  in  the  promotion  of 
the  country's  wealth. 

SIXTH. — The  decline  of  the  interest  rate,  at  times  of 
depression,  does  not  prove  the  existence  of  huge  accumu- 
lations of  idle  cash  funds. 

SEVENTH. — The  point  raised  by  some  authors  that 
the  demand  for  working  forces  should  not  only  be  meas- 
ured by  the  amount  of  money  involved,  but  also  by  the 
class  of  demand,  whether  for  luxuries  or  for  necessaries, 
does  not  seem  to  be  well  founded.  The  demand  for 
luxuries  will,  indirectly,  involve  a  demand  for  neces- 
saries. 

EIGHTH. — While  the  purchase  of  commodities  (for 
purposes  of  consumption)  will  primarily  reward  past 
labor  and  enterprise,  it  will  also  stimulate  future  pro- 


Pros  and  Cons.  125 


duction.  The  latter  function  is  by  far  the  more  important 
one  and  in  fact  the  only  one  which  determines  the  trend 
of  business,  whether  brisk  or  dull. 

NINTH. — The  impoverishment  of  wealthy  individuals 
frequently  has  its  origin  in  general  conditions  beyond  the 
individual 's  control,  though  usually  ascribed  to  personal 
causes,  squandering,  etc.  If  really  due  to  squandering, 
this  does  not  inflict  upon  the  community  those  baneful 
consequences  which  most  authors  speak  of,  and  which  are 
based  upon  erroneous  suppositions — upon  conditions 
which  do  not  exist.  As  a  rule  the  squanderer  harms  only 
himself,  not  the  community. 

TENTH. — It  may  seem  that  there  are  numerous  ways 
of  investing  savings  or  cash  funds  outside  of  the  Capital- 
istic Form  (represented  by  enterprise  and  new  construc- 
tions) and  outside  of  the  Impairing  Form  (described  in 
this  treatise) ;  but  there  are  practically  none  excepting 
only  those  indicated  in  the  Chart  by  Lines  12,  13  and  14, 
see  page  36. 

ELEVENTH. — Whether  our  country's  saving  power 
amounts  to  something  like  three  billions  per  annum,  as 
assumed  in  this  treatise,  or  to  a  much  smaller  amount, 
that  does  not  give  much  of  a  guide  for  measuring  the 
extent  of  the  harm  which  possibly  can  be  caused  by  the 
saving  activity  whenever  it  assumes  the  Impairing  Form. 
Most  of  the  harm  is  brought  about  by  the  intervention  of 
the  Multiplying  Principle. 

TWELFTH.— The  fact  that  "Excess  Savings"  really 
exist — an  assumption  which  forms  the  basis  of  my  entire 
argument — though  hardly  susceptible  of  proof  by  direct 
statistical  data,  can  be  amply  demonstrated  by  positive 
as  well  as  by  circumstantial  evidence. 


CHAPTER    VII. 

VARIOUS  FACTORS  AFFECTING 
PROSPERITY. 

WHILE  prosperity  is  bound  to  wane  whenever  the 
saving  activity  assumes  the  Impairing  Form  to 
any  large  extent,  I  do  not  wish  to  be  understood  as  main- 
taining that  this  factor  is  the  only  one  which  may  under- 
mine prosperity.  In  reality  the  latter  depends  upon  a 
number  of  factors,  all  of  which  must  co-operate,  and  the 
absence  of  any  one  of  them  may  cause  business  to  lan- 
guish. To  go  over  the  entire  field  and  thoroughly  inves- 
tigate all  these  various  factors  would  lead  beyond  the 
limits  of  this  treatise.  On  the  other  hand,  a  crisis  theory 
would  hardly  be  regarded  as  complete,  or  even  accept- 
able, if  it  ignored  these  factors  altogether,  and  I  there- 
fore deem  it  approprate  briefly  to  consider  them. 


THE  MONEY  SUPPLY,— The  relation  of  this  factor 
to  economic  disturbances  has  been  dealt  with  to  same  ex- 
tent in  Chapter  1,  but  its  importance  justifies  further 
consideration. 

It  does  not  seem  that  the  kind  of  money,  whether 
gold,  silver  or  paper  (even  inconvertible  paper)  matters 
much  in  determining  whether  business  conditions  shall 
be  prosperous  or  the  reverse.  The  United  States  got 
along  very  well  with  inconvertible  paper  money  in  the 
decade  preceding  the  panic  year  of  1873,  better  than 
England  did  with  its  gold  standard;  the  merit  of  a  sound 
monetary  system  apparently  consisting  chiefly  in  its  com- 
mercial convenience.  Much  more  important  is  a  supply 


Various  Factors  Affecting  Prosperity.  127 

of  money  adequate  to  the  country's  needs,  and  it  seems  to 
be  particularly  the  case  that  any  drain  which  will  reduce 
the  supply  below  this  requirement  will  work  mischief. 
Such  a  drain  may  take  place  in  various  ways,  and  may 
be  either  an  actual  one,  where  the  coin  leaves  the  coun- 
try or  the  circulation ;  or  it  may  be  a  relative  one,  brought 
about  by  depreciation.  At  the  time  when  Rome  drained 
its  dependencies  in  the  shape  of  annual  tributes,  those 
dependencies  withered.  In  modern  times  a  tendency  to 
drain  the  weaker  countries  of  their  cash  is  often  brought 
about  by  foreign  trade,  but  is  met  by  the  issue  of  incon- 
vertible paper  money,  which  renders  the  currency  unfit 
for  exportation — an  expedient  which,  though  not  fully 
sufficient  for  maintaining  that  "adequate  money  supply " 
which  constitutes  one  of  the  elements  necessary  to  pros- 
perous conditions,  is  certainly  the  next  best  thing  to  it. 

There  is  a  peculiar  kind  of  drain,  however,  which 
has  been  steadily  i?oing  on  for  the  last  ten  years  and 
which  can  not  be  met  so  easily  as  the  one  just  mentioned. 
I  mean  the  depreciation  of  money — a  subject  that  has 
hardly  received  the  attention  it  deserves.  Not  the  depre- 
ciation that  attaches  to  paper  money,  if  inconvertible,  or 
if  issued  to  excess,  but  the  depreciation  of  the  sound 
money,  of  the  gold  itself,  as  indicated  by  the  constant 
rise  of  all  wages  and  prices.  A  certain  total  of  the  money 
supply  may  be  adequate  to  carry  on  a  country's  business 
at  a  certain  level  of  wages  and  prices,  but  not  at  a  higher 
level,  and  if  nevertheless  the  level  rises,  this  would  act 
practically  the  same  as  a  drain  on  the  money  volume. 

An  artificial  drain  of  this  character  goes  on  especially 
at  times  of  prosperous  business.  At  such  times  the  work- 
ingmen,  always  struggling  to  obtain  higher  wages,  are 
helped  by  the  greater  demand  for  labor,  and  they  largely 
succeed  in  their  endeavors.  This  means  greater  cost  of 
production  and  this  again  higher  prices  of  commodities 


128  Various  factors  Affecting  Prosperity. 

— a  result  which  is  still  more  aggravated  by  the  action 
of  the  trusts  in  keeping  up  high  prices  and  suppressing 
competition.  Gradually  the  working  classes  find  that 
the  advantage  gained  from  the  higher  wages  is  slipping 
away,  owing  to  the  increased  cost  of  living,  and  to  rem- 
edy this,  they  will  again  contend  for  higher  wages.  In 
consequence  of  this  process  more  money  is  needed  to 
carry  on  the  country's  trade  and  traffic,  as  has  been 
strikingly  illustrated  by  recent  experience  in  the  United 
States,  where,  in  spite  of  the  immense  augmentation  in 
the  volume  of  money,  there  was  so  much  of  the  latter 
absorbed  in  the  regular  channels  of  trade  that  a  continu- 
ous paucity  of  cash  funds  was  witnessed  in  the  money 
market,  so  much  so  as  to  keep  the  latter  constantly  on 
the  verge  of  a  collapse.  Under  such^  conditions  some 
circumstance,  trivial  in  itself,  may  prove  sufficient  to 
shake  confidence,  and  bring  about  the  collapse,  thus  ush- 
ering in  crisis  and  depression — which  might  have  been 
staved  oft*  for  years  but  for  the  disturbing  influence  of 
the  enforced  rise  in  wages  and  prices.  A  high  protective 
tariff  which  prevents  the  leveling  influence  of  foreign 
competition  makes  matters  worse. 

Here  we  arrive  at  a  peculiar  interplay  of  conflicting 
tendencies.  On  the  one  hand,  prosperity  tends  to  create 
an  artificial  drain  of  the  money  supply,  inasmuch  as  it 
favors  the  rise  of  wages  and  prices  and  thus  depreciates 
the  money  in  circulation;  on  the  other  hand,  this  arti- 
ficial drain  tends  to  undo  prosperity,  or  at  least  en- 
danger its  continuance,  by  injuriously  affecting  one  of 
its  essential  conditions — an  adequate  money  supply. 
•  ••*•••• 

History  shows  us  a  strange  adaptation  of  a  country's 
monetary  requirements  to  its  actual  supply  of  money.  In 
modern  times,  and  especially  in  recent  decades,  the  sup- 
ply has  increased  enormously,  but  (except  at  times  of 


Various  Factors  Affecting  Prosperity.  129 

depression)  we  do  not  find  any  part  of  it  superfluous,  all 
of  it  being  absorbed  in  the  circulation — apparently  from 
the  reason  that  wages  and  prices  are  always  being  pushed 
up  to.  (or  near^  the  limit  which  the  money  supply  will 
permit.  While  this  automatic  adaptation  of  wages  and 
prices  to  the  country's  total  money  volume  exercises  a 
stimulating  influence  on  business  activity  so  long  as  the 
supply  keeps  on  increasing,  it  has  the  opposite  effect  if  it 
diminishes,  as  we  have  seen  in  the  case  of  Rome's  prov- 
inces. In  such  an  event  wages  and  prices  needs  must  ad- 
just themselves  to  correspond  with  the  shrinkage  of  the 
supply,  and  must  come  down  to  a  lower  level ;  but  the 
transition  process  is  a  painful  one,  engendering  severe 
struggles  and  bitter  controversies  before  workingmen 
accept  the  lower  wages  and  business  men  the  lower 
prices.  And  as  a  rule  it  can  not  be  accomplished  without 
the  intervention  of  depressions  or  economic  disturbances. 
Adjustments  of  this  kind  (whether  of  a  depressing 
character  if  for  the  lower,  or  of  a  stimulating  character 
if  for  the  higher)  have  always  gone  on  wherever  the  laws 
of  supply  and  demand  have  "had  free  scope  so  as  to  allow 
of  proper  competition.  Within  recent  years,  however, 
two  new  elements  have  sprung  into  prominence,  tending 
to  counteract  the  operation  of  natural  forces — the  unex- 
pected power  attained  by  the  labor  unions  on  the  one 
hand  and  by  industrial  combinations  (trusts,  etc.)  on  the 
other — powers  which  have  proved  fully  capable  of  en- 
forcing a  steady  rise  of  wages  and  prices  without  the 
least  concern  as  to  whether  the  country's  money  supply 
is  sufficient  to  meet  the  enlarged  demands  thereby  im- 
posed upon  it.  This  unceasing  and  seemingly  irresistible 
struggle  for  higher  wages  and  prices  which  has  gone  on 
for  a  decade,  and  which,  as  stated,  has  been  equivalent 
to  an  artificial  drain  upon  the  country's  currency  vol- 
ume, tended  to  contravene  one  of  the  conditions  essential 


130  Various  Factors  Affecting  Prosperity. 

to  prosperity,  namely,  an  adequate  money  supply.  Of 
late  years  the  latter  has  been  largely  augmented  by  arti- 
ficial means,  notably  in  the  United  States,  in  the  shape 
of  an  expansion  of  bank  money5.  This  expansion  has  been 
large  enough  to  fully  meet  the  increased  demands  made 
i;pon  the  money  volume.  But  the  expansion  could  not  go 
on  forever,  inasmuch  as  it  was  breeding  troubles  of  its 
own.  Then  the  law  asserted  itself  that  the  demand  upon 
the  money  supply  must  keep  within  the  limits  of  the 
money  volume — a  collapse  ensued  which  made  an  end, 
for  the  time  being,  to  the  aggressions  of  labor  unions  and 
trusts  and  to  their  endeavors  for  higher  wages  and  prices 
— a  collapse  which  probably  would  not  have  taken  place 
but  for  the  doings  of  these  two  factors. 

I  repeat,  an  adequate  money  supply  is  one  of  the  es- 
sentials of  prosperity.  Though  business  conditions  will 
gradually  adjust  themselves  to  a  change  in  the  money 
volume,  the  process  of  transition  means  economic  dis- 
turbance whenever  the  change  takes  place  in  the  shape 
of  a  shrinkage  of  the  volume- -no  matter  whether  the 
shrinkage  is  a  positive  one,  in  the  form  of  a  drain  upon 
the  gold  supply,  or  an  artificial  one,  in  the  form  of  de- 
preciation, i  e.  a  diminution  of  the  purchasing  power  of 
a  gold  dollar. 

INDUSTRY. — Obviously,  this  is  an  essential  of  pros- 
perous conditions.  In  a  community  of  lazy  negroes  who 
shun  work,  we  will  not  find  business  activity  nor  any 
wealth  to  speak  of.  But  while  industry  is  essential  to 
prosperity,  it  will  not  of  itself  insure  it,  as  is  shown  by 
the  example  of  China,  whose  people  are  very  industrious, 
but  nevertheless  very  poor.  It  is  well  understood  that 
in  order  to  attain  best  results  in  the  lines  of  industry 
and  production  it  takes  more  than  mere  physical  exer- 
tion, and  that  the  latter  must  be  supplemented  by  proper 
means  of  production,  machines,  factories,  railroads,  etc. 


UNIVERSITY 


Various  Factors  Affecting  Prosperity.  131 

On  the  other  hand,  history  tells  us  that  even  in  olden 
times  periods  of  prosperity  have  existed  now  and  then  in 
spite  of  the  primitive  means  of  production,  whereas  in 
modern  times  depressions  are  by  no  means  uncommon, 
notwithstanding  the  multiplication  of  appliances  de- 
signed to  aid  production. 

In  leading  countries  we  find  no  lack  of  industry  nor 
of  the  productive  capital  required  to  obtain  best  results 
from  it;  but  we  generally  do  find  a  lack  of  opportunities 
for  industry  to  display  its  full  powers,  and  to  keep  all 
working  forces  employed.  At  times,  exceptional  condi- 
tions may  prevail  where  this  rule  does  not  hold  true,  as 
was  recently  the  case  in  the  United  States  and  in  Ger- 
many; but  it  is  well  understood  that  such  exceptional 
conditions  will  not  last  and  .that  sooner  or  later  the  high 
tension  will  relax.  Then  we  will  see  normal  conditions 
return:  industry  will  suffer  from  the  want  of  an  active 
market,  and  part  of  the  working  forces,  though  willing 
to  work,  have  to  remain  idle. 

ENTERPRISE. — This  element,  too,  constitutes  one  of 
the  essentials  of  prosperity,  though  it  is  not  quite  so  far- 
reaching  in  its  influence  as  generally  assumed.  Many 
economists  consider  it  to  be  the  leader,  the  moving  force 
in  the  march  of  progress  and  of  business  activity.  As  a 
matter  of  fact,  however,  it  is  as  often  the  follower  as  the 
leader.  All  depends  upon  circumstances  and  conditions. 
Where  these  are  favorable,  and  offer  a  reward  to  enter- 
prise and  new  undertakings,  the  latter  will  not  be  lack- 
ing: where  they  are  unfavorable,  enterprise  can  not  turn 
the  tide,  and.  of  itself,  bring  about  prosperity.  Let  us 
cite  some  illustrations. 

The  building  of  a  railroad  through  an  unsettled  terri- 
tory in  the  United  States,  with  the  expectation  of  a  sub- 
sequent influx  of  settlers,  who  will  build  cities  and  vil- 
lages, till  the  ground  and  establish  industries,  may  seem 


132  Various  Factors  Affecting  Prosperity. 

to  be  a  clear  case  showing  how  enterprise  leads  and,  of 
itself,  brings  business  activity  and  prosperity  into  a  wil- 
derness. But  does  not  enterprise,  even  here,  follow  cir- 
cumstances and  conditions,  and  would  the  railroad  have 
.been  built  unless  the  circumstances  had  been  favorable 
enough  to  warrant  it?  In  contrast  herewith  let  us  con- 
sider a  case  where  the  favorable  conditions  are  doubtful. 
Let  us  suppose  that  some  twenty  or  thirty  years  ago  na- 
tives of  China  had  contemplated  the  building  of  a  rail- 
road in  their  own  country  through  a  thickly-populated 
territory,  where,  from  a  European  pcftnt  of  view,  the  suc- 
cess should  have  been  immense — was  it  lack  of  enterprise 
which  restrained  them  from  going  into  such  an  under- 
taking? Hardly.  They  knew  they  would  not  succeed. 
They  knew  they  would  be  sure  to  fall  victims  to  the  ex- 
actions of  their  corrupt  officials  and  to  the  likin  system 
which  harries  all  traffic  in  China.  Let  us  assume,  as  a 
third  illustration,  that  a  foreign  power  would  give  pro- 
tection to  the  building  of  a  railroad  in  China;  then  we 
will  see  enterprise  come  forward  at  once  and  capital  flow 
in — simply  because  the  conditions  of  success  which  were 
absent  in  the  former  case  are  now  at  hand. 

We  could  cite  many  other  instances  to  show  that  en- 
terprise can  thrive  only  where  the  conditions  of  success 
are  pre-existent.  In  a  new  country  like  the  United 
States,  which  offers  many  opportunities  for  new  under- 
takings, unhampered  by  lawlessness  or  other  drawbacks, 
there  enterprise  flourishes.  In  old  countries,  whose  op- 
portunities have  largely  been  seized  on  already,  the  field 
for  enterprise  is  much  more  restricted,  consequently  prof- 
itable openings  are,  to  quite  an  extent,  sought  for  abroad. 
Again,  opportunities  for  enterprise  become  scarce  during 
periods  of  depression ;  it  is  well  known  that  at  such  times 
enterprise  will  not  avail  and  is  bound  to  lag. 

Enterprise  must  be  regarded  as  the  antidote,  or  really 


Various  Factors  Affecting  Prosperity.  133 

as  the  preventive,  of  Impair  Savings,  and  therewith  of 
depressions.  On  the  other  hand,  the  latter  (Impair  Sav- 
ings) act  also  as  a  preventive  of  the  former,  the  one 
tending  to  exclude  the  other.  Where  enterprise  is  suf- 
ficiently active  to  absorb  all  the  savings  of  a  country, 
there  is  no  room  for  depressions.  Where  it  does  not  ab- 
sorb all  of  them  and  where,  consequently,  a  portion  will 
become  Impair  Savings,  the  latter  will  at  once  do  their 
part  to  subdue  enterprise — since  they  curtail  consump- 
tion (as  explained  in  Chapter  3),  therewith  production, 
therewith  the  demand  for  the  means  of  production  (fac- 
tories, railroads,  constructions  of  any  kind),  and  there- 
with enterprise,  the  latter  deriving  its  support  princi- 
pally from  the  demand  for  new  constructions.  Enterprise 
thus  being  compelled  to  slacken  its  pace,  the  formation 
of  Impair  Savings  (i.  e.,  of  funds  not  used  for  new  con- 
structions) will  grow  in  proportion,  and  this  in  turn  will 
tend  to  check  enterprise  still  more,  eventually  almost 
stifling  it,  as  is  so  painfully  evidenced  by  unprogressive 
countries  like  China  and  India. 

Enterprise  no  doubt  constitutes  one  of  the  factors  es- 
sential for  a  country's  prosperity,  and  the  peoples  most 
alert  in  this  direction  count  among  the  wealthiest.  But 
I  repeat,  it  is  not  nearly  so  much  of  a  primary  factor  as 
ordinarily  supposed,  being  itself  dependent  upon  the  ex- 
istence of  favorable  opportunities  and,  to  a  large  extent, 
upon  the  absence  of  Impair  Savings. 

FOREIGN  TRADE.— This,  when  in  a  healthy  state, 
certainly  constitutes  one  of  the  essentials  of  prosperous 
conditions.  But  on  the  other  hand  it  harbors  the  possi- 
bility of  peculiar  complications.  Though  in  the  main 
beneficial  to  all  parties  concerned,  it  does  not  benefit  all 
nations  aiike.  In  its  highest  conception  foreign  trade  is 
considered  a  refined  species  of  barter,  and  if  it  were 
nothing  but  that,  no  corrmlications  would  result.  But  the 


134  Various  Factors  Affecting  Prosperity. 

foreign  transactions  do  not  alwaj^s  offset  each  other  in 
the  shape  of  goods  or  services;  there  are  residual  bal- 
ances, and  these  may  pile  up  from  year  to  year,  thus  giv- 
ing rise  to  the  development  of  so-called  debtor  and  cred- 
itor nations.  The  latter  are  always  growing  wealthy  and 
evidently  are  getting  the  better  end  of  the  bargain. 
Debtor  nations  may  likewise  be  benefited  in  spite  of  be- 
coming indebted,  provided  they  are  thereby  enabled  to 
build  up  new  productive  capital  at  home,  as  is  the  case 
with  newly  settled  countries.  But  where,  as  in  the  case 
of  Russia,  a  country  becomes  indebted  simply  because  it 
is  too  weak  to  successfully  compete  with  foreign  nations 
and  because  it  is  unable  to  hold  its  own  in  its  trade  with 
the  outside  world,,  there  the  complications  referred  to 
may  actually  set  in,  and  may  lead  to  poverty,  to  a  weak 
economic  condition,  and  to  chronic  financial  embarrass- 
ment. 

Such  debtor  countries  gradually  have  to  increase 
their  exports  as  against  their  imports,  the  annual  excess 
representing  the  tribute  they  pay  to  the  outside  world 
owing  to  their  indebtedness- — this  as  a  sequence  to  the 
fact  that  at  some  period  of  the  past  their  exports  were 
not  large  enough  to  balance  their  foreign  accounts. 

A  conspicuous  example  showing  how  the  annual 
residual  balances  of  foreign  trade  may  pile  up  to  an  en- 
ormous amount  in  the  course  of  many  years,  is  given  us 
by  France,  which  is  said  to  own  more  than  5  billion  dol- 
lars' worth  of  foreign  securities.  To  attribute  this  stu- 
pendous accumulation  of  credits  entirely  to  the  course  of 
her  foreign  trade,  may,  at  first  si«'ht,  seem  absurd,  but  is 
undoubtedly  correct.  How  did  France  pay  for  those  se- 
curities? For  the  one  or  the  other  of  the  individual  loans 
she  may  have  paid  out  the  actual  gold,  but  did  her  stock 
of  gold,  in  the  long  run,  become  smaller  thereby?  Did 
not  she  manage  to  recover,  from  other  nations,  the  gold 


Various  Factors  Affecting  Prosperity.  135 

so  paid  out?  And  could  she  recover  this  gold  without 
giving  goods  or  services  in  exchange  for  it?  As  a  matter 
of  fact,  France  paid  for  those  foreign  securities,,  not  in 
cash,  but  in  the  shape  of  export  goods  or  services.  True, 
it  also  took  a  corresponding  degree  of  saving  activity  on 
the  part  of  the  French  people  in  order  to  accumulate  the 
funds  invested  in  those  foreign  credits,  but  these  credits 
could  never  have  been  built  up,  and  the  saving  activity 
would  have  been  of  no  avail  to  that  end,  without  the 
concurrence  of  the  highly  favorable  trade  balance.  Sup- 
pose the  latter  were  wanting,  and  French  capitalists 
would  nevertheless  undertake  to  buy  a  billion  dollars' 
worth  of  foreign  securities;  then  they  would  have  to 
send  that  much  cash  abroad,  and  the  drain  of  gold  would 
at  once  derange  their  home  markets  in  a  manner  to  make 
a  continuance  of  such  buying  impossible. 

The  term  "foreign  trade"  should  be  understood  in  its 
broad  sense,  covering  not  only  the  movement  of  goods, 
but  all  elements  affecting  a  country's  foreign  account, 
such  as  ocean  freight,  expenditures  of  foreign  tourists, 
interest  accruing  on  foreign  investments,  etc.  The  two 
latter  items  form  the  chief  source  of  France's  favorable 
foreign  balance- -which,  as  is  well  known,  does  not  mani- 
fest itself  in  the  shape  of  a  large  surplus  of  exports  over 
imports,  but  which  nevertheless  enables  the  French  to 
continually  augment  their  holdings  of  foreign  securities. 

While  foreign  trade  represents  the  principal  source 
of  France's  enviable  financial  condition,  it  also  repre- 
sents the  source  of  the  wretched  condition  of  Russia's 
finances.  This  country  has  become  heavily  indebted  to 
the  outside  world,  owing  to  the  unfavorable  state  of  her 
trade  balances,  and  as  a  sequence  to  this  indebtedness 
she  is  subjected  to  a  constant  drain  upon  her  resources, 
which  impoverishes  her  in  the  same  proportion  as  it  en- 
riches other  countries.  Indebtedness  is  no  less  objection- 


136  Various  Factors  Affecting  Prosperity. 

able  for  a  country  than  for  an  individual,*  especially  so 
where  no  values  are  created  to  offset  the  debt.  Can  Rus- 
sia's railroads,  owned  by  the  Government,  be  considered 
as  partly  offsetting  her  foreign  debt,  and  to  that  extent 
justifying  its  creation?  Hardly.  Other  European  nations 
build  their  railroads  out  of  their  own  resources,  not  with 
foreign  funds. 

Not  only  will  foreign  trade  prove  instrumental  in 
making  some  countries  tributary  to  others,  but  it  may 
also  interfere  more  or  less  with  a  country's  economic 
conditions  so  far  as  home  trade  is  concerned.  On  page 
105  I  have  emphasized  that  those  countries  thrive  best  in 
which  there  obtains  a  proper  mixture  of  saving  propen- 
sity on  the  one  hand  and  of  spending  propensity  on  the 
other;  foreign  trade,  however,  will  to  some  extent  dis- 
turb the  working  of  this  principle. 

Let  us  conceive  of  an  island  commercially  isolated, 
where  the  inhabitants  are  moderate  savers  but  neverthe- 
less fond  of  good  living.  If  of  industrious  habits  they 
would  be  wealthy,  even  though  their  means  of  produc- 
tion may  not  rank  with  ours.  Business  would  prosper 
and  the  demand  would  be  brisk.  Should  now  the  island 
be  opened  to  foreign  trade,  followed  by  the  influx  of 
cheap  foreign  manufactures,  the  brisk  home  demand 
would  readily  absorb  the  latter,  and  without  a  corre- 
sponding outgo  of  domestic  goods  the  island  would  soon 
become  indebted  to  the  outside  world — a  result  which,  as 


*  Some  economists  hold  that  where  one  country  becomes  indebted 
to  another,  this  is  practically  a  migration  of  capital,  even  where  the 
debt  originates  from  the  importation  of  consumptibles  which  repre- 
sent no  capital  and  whose  value  is  destroyed  when  they  are  con- 
sumed. For  instance,  a  factory  in  the  United  States  may  be  built 
with  English  capital,  the  latter  coming  over  not  in  the  shape  of  cash 
but  of  goods;  such  importation  would  relieve  us  from  making  the 
goods  ourselves  and  would  set  our  working  forces  free  to  work  on 
the  factory(?). 

Such  a  transaction  might  be  taken  for  a  migration  of  capital,  on 
the  ground  that  we  built  up  home  capital  sufficient  to  offset  the  for- 
eign debt.  In  reality  the  transaction  would  merely  prove  that  we 
were  unable  to  hold  our  own  in  foreign  trade  and  unable  to  pay  for 
our  imports  with  our  exports. 


Parlous  Factors  Affecting  Prosperity.  137 

stated,  is  as  objectionable  for  a  country  as  for  an  indi- 
vidual. Here  we  find  that  the  inclination  for  good  living, 
which  among  an  industrious  people  ought  to  promote 
demand,  and  therewith  production,  becomes  the  means 
for  impoverishing  the  community  unless  it  is  able  to  hold 
its  own  against  the  aggressions  of  foreign  trade.  As  a 
consequence  of  such  impoverishment  the  buying  of  for- 
eign goods  would  soon  meet  a  natural  check,  and  the  de- 
mand for  home  production  would  be  disturbed  from  the 
very  beginning. 

A  healthy  condition  of  the  foreign  trade  is  therefore 
highiy  essential  for  ensuring  prosperous  conditions.  Only 
where  a  country  manages  to  hold  its  own  in  this  respect, 
so  as  not  to  lose  ground  or  become  impoverished  by  for- 
eign trade — only  there  the  proper  mixture  of  saving  and 
expending  propensity  will  produce  its  beneficent  results. 
And  as  a  matter  of  fact  we  find  that  among  the  leading 
nations  the  evolution  of  foreign  intercourse  has  taken 
such  a  turn  that  they  are  not  (like  Russia,  Turkey  and 
the  South  American  States)  left  subject  to  a  constant 
drain  of  their  wealth,  but  on  the  contrary,  they  have 
shaped  their  foreign  relations  so  that,  they  derive  a  sur- 
plus income  at  the  expense  of  other  countries,  which 
makes  them  all  the  wealthier. 

Not  only  the  economic  conditions  of  a  country  may 
be  affected  by  foreign  trade,  but  also  its  money  supply, 
as  has  already  been  pointed  out  in  the  early  part  of  this 
chapter.  All  of  which  goes  to  show  that  a  healthy  state 
of  the  foreign  trade  is  by  no  means  an  insignificant  ele- 
ment in  supporting  business  activity. 


Outside  of  the  four  factors  considered  in  the  forego- 
ing pages — industry,  enterprise,  an  adequate  money  sup- 
ply, a  healthy  state  of  the  foreign  *rade — several  others 


138  Various  Factors  Affecting  Prosperity. 

may  be  enumerated  which  likewise  are  important  in  se- 
curing a  country's  prosperity,  such  as:  good  laws;  sta- 
bility in  the  government;  a  wise  fiscal  system;  a  bounti- 
ful supply  of  productive  capital;  promptness  in  the  in- 
vestment of  savings,  etc.,  etc.  But,  strange  to  say,  and 
here  we  arrive  at  the  essential  point  of  our  discussion, 
all  of  these  factors  may  co-exist  in  a  country,  and  still 
prosperity  may  be  lacking.  England  affords  an  example 
of  this.  We  find  all  of  the  above  factors  well  represented 
there,  nevertheless  periods  of  depression  occur  quite 
often — which  goes  to  show  that  the  presence  of  all  of 
these  several  factors  and  the  freest  scope  for  their  co- 
operation does  not  of  itself  suffice  to  banish  those  dis- 
tressing spells  of  stagnant  business.  To  accomplish  this 
we  have  to  keep  that  element  out  of  our  economic  system 
which  causes  the  discrepancy  between  supply  and  de- 
mand and  which  so  far  has  escaped  the  attention  of  our 
economists — Impair  Savings. 


CHAPTER    Fill. 

RECENT  UPS  AND  DOWNS  OF  PROS- 
PERITY IN  THE  UNITED  STATES. 

IN  the  preceding  chapter  1  have  pointed  out  that  the 
maintenance  of  prosperous  conditions  depends  not 
only  upon  a  healthy  state  of  the  saving  activity  but  also 
upon  the  co-operation  of  various  other  factors — an  ade- 
quate money  supply;  a  favorable  condition  of  foreign 
trade;  industry;  and  enterprise.  The  latter  two  factors 
depend  largely  upon  individual  energy;  and  inasmuch  as 
we  generally  find  an  abundance  of  this  in  our  modern 
communities,  we  also  find  an  abundance  of  industry  and 
enterprise,  the  only  limit  being  drawn  by  local  condi- 
tions; so,  if  economic  disturbances  occur,  the  primary 
cause  thereof  should  not  be  sought  in  a  relaxation  of 
those  two  factors.  For  instance,  the  panic  of  1907  was 
not  caused  by  any  slowing  down  of  industry  or  enter- 
prise. Quite  different  is  the  situation  with  regard  to  the 
other  two  elements,  foreign  trade  and  the  money  supply. 
These  do  not  depend  so  much  upon  individual  energy,  as 
upon  a  multiplicity  of  circumstances  quite  complex  in 
their  nature  and  hard  to  control,  and  though  the  figures 
and  totals  representing  them  may  not  vary  much  from 
year  to  year,  these  variations  may  in  course  of  time  ef- 
fect considerable  changes  in  a  country's  economic  condi- 
tion. To  show  how  these  important  factors,  saving  activ- 
ity, money  supply,  and  foreign  trade,  will  affect  prosper- 
ity as  changes  in  their  status  take  place,  a  concrete  ex- 
ample may  be  instructive,  such  as  is  supplied  by  the  re- 
cent economic  history  of  the  United  States.  Let  us  re- 
view this,  commencing  as  far  back  as  1893. 


140  Recent   Ups  and  Downs  of 

CAUSES  OF  THE  PANIC  OF  1893. 

Previous  to  the  panic  year  o£  1893  two  elements  of 
disturbance  had  been  at  work  for  quite  some  time:  first, 
our  foreign  trade  (comprising  the  movement  of  merchan- 
dise and  securities,  ocean  freights,  interest,  tourists'  ex- 
penditures, etc.)  had  resulted  in  a  growing  indebtedness 
to  Europe;  second,  the  money  supply  had  been  artificially 
inflated  by  the  annual  injection  of  large  amounts  of  sil- 
ver currency.  Now  it  is  not  true,  though  it  has  often 
been  asserted,  that  business  men  and  capitalists  took 
fright  at  the  silver  inflation  and  on  that  account  became 
chary  of  engaging  in  new  enterprises,  and  that  this 
fright  caused  the  panic ;  for  as  a  matter  of  fact  the  busi- 
ness world  paid  no  attention  whatever  to  the  changing 
character  of  our  currency  previous  to  the  catastrophe  of 
1893.  Nevertheless,  the  inflation  had  something  to  do 
with  the  panic.  It  worked  harm  in  an  unsuspected  man- 
ner. As  explained  on  page  129,  a  gradually  increasing 
supply  of  currency  will  not  result  in  an  accumulation  of 
idle  cash  funds  in  the  money  market,  but  will  usually 
find  absorption  in  the  channels  of  production  and  trade 
— prices  and  wages  rising  accordingly.  Such  rise  of 
prices  reacts  upon  foreign  trade,  making  the  home  mar- 
ket a  good  one  for  foreigners  to  sell  in  but  a  poor  one  to 
buy  in :  and  here  we  arrive  at  the  cause  of  the  unfavor- 
able development  of  our  foreign  trade*  and  of  the  conse- 

*  It  may  seem  that  a  rise  of  prices,  if  it  took  place,  should  have 
manifested  itself  by  a  rise  of  the  "index  figures"  and  that  an  un- 
favorable balance  should  have  manifested  itself  by  an  excess  of  im- 
ports over  exports;  while  statistics  showed  neither.  Let  us  examine 
the  reasons  why  the  statistics  did  not  reveal  the  facts. 

The  rise  of  prices,  due  to  that  inflation  of  the  currency,  was 
comparative  rather  than  absolute.  Prices  in  other  countries  were 
steadily  declining  (in  compliance  with  the  universal  retrograde  move- 
ment of  prices  which  took  place  between  1873  and  1897).  but  with  us 
the  decline  was  largely  checked  bv  the  inflation  of  the  currency. 
Without  this  inflation  all  prices  and  wages  would  have  been  forced 
to  a  lower  basis,  the  same  as  in  Europe,  and  we  then  would  have 
been  in  a  better  position  to  hold  our  own  in  foreign  trade.  But  as  it 
was,  we  had  comparatively  higher  prices,  due  to  the  inflation,  with- 
out higher  index  figures. 

As   to   the   statistics   of   foreign   trade,    they  showed   quite  an  ex- 


Prosperity  in  the   United  States.  141 

quent  growth  of  our  foreign    indebtedness    which  took 
place  at  that  time. 

This  growth  could  not  go  on  forever.  For  many 
years  Europeans  had  been  content  to  take  American 
bonds  and  stocks  and  other  titles  to  property,  in  pay- 
ment for  the  annual  dues  accruing  in  their  favor,  but 
finally  they  showed  a  decided  preference  for  cash,  and 
the  drain  of  funds  which  followed  reduced  our  money 
markets  to  that  precarious  condition  where  any  un- 
toward occurrence  may  cause  a  collapse. 

LEADING   FEATURES  OF  THE   PANIC   OF   1893  AND 
OF  THE  SUBSEQUENT  DEPRESSION. 

An  untoward  event,  of  the  nature  just  referred  to, 
took  place  in  the  spring  of  1893  when  a  gang  of  specu- 
lators made  an  onslaught  on  the  stock  market.  Taking 
advantage  of  the  weak  situation,  they  had  been  making 
11  short  sales"  of  stocks  to  a  large  extent,  and  now  raided 
the  market,  managing  to  depress  prices  by  all  sorts  of 
devices  in  order  to  cover  their  " short  sales"  at  low  fig- 
ures and  thus  reap  large  profits.  One  of  the  devices  con- 
sisted in  creating  an  artificial  shortage  of  money,  which 
?argely  helped  to  depress  prices  and  to  shake  confidence. 
They  even  went  so  far  as  to  negotiate  large  loans  with 
the  commercial  banks,  paying  interest  on  these  loans  but 
leaving  the  funds  unused,  thus  tying  them  up  and  keep- 
ing them  out  of  the  reach  of  others.  In  consequence  the 
tightness  of  money  became  quite  severe,  spreading  from 
the  Stock  Exchange  to  other  lines  of  business,  and  from 
New  York  to  all  parts  of  the  country,  everywhere  de- 
cess  of  exports  over  imports,  for  the  years  preceding  the  panic  year, 
and  might  therefore  be  construed  as  favorable.  For  the  four  years 
1889  to  1893  the  export  surplus  averaged  $73,000,000  per  annum.  When 
considering,  however,  that  our  annual  dues  to  Europe  for  interest, 
ocean  freights,  tourists'  expenditures,  came  to  not  less  than  double 
that  amount  (according  to  the  compilations  of  the  New  York  Journal 
of  Commerce)  and  possibly  to  more,  it  becomes  clear  that  the  seem- 
ingly faArorable  statistics  of  foreign  trade  did  not  reveal  the  true 
situation. 


142  Recent   Ups  and  Downs  cf 

pressing  market  values  and  prices,  engendering  distrust 
as  to  what  might  follow,  and  causing  a  mad  rush  to  real- 
ize on  property  before  things  would  get  worse. 

The  panic  continued  for  several  months  before  the 
general  anxiety  was  allayed.  After  that  the  funds  which 
had  disappeared,  owing  to  the  prevailing  distrust,  came 
forth  from  their  hiding-places,  flowing  into  the  commer- 
cial banks  and  causing  a  glut  in  the  money  market.  Con- 
fidence evidently  returned,  but  not  prosperity.  Large 
amounts  of  idle  cash  funds  were  on  hand,  ready  for  any 
profitable  investment  that  might  offer,  but  such  oppor- 
tunities had  become  exceedingly  scarce.  Enterprise 
seemed  to  be  stifled.  Ordinarily  the  field  for  enterprise 
and  for  investments  must  be  found  in  the  creation  of 
new  productive  capital ;  like  factories,  etc. :  but  an  ex- 
tension of  these  pre-supposes  an  increased  demand  for 
their  products,  and  this  demand  was  lacking. 

"Why  was  it  lacking?  What  caused  the  great  falling 
off  of  the  demand  which  took  place  at  that  time  ?  It  was 
brought  about  by  that  mysterious  factor  which  so  often 
has  proved  the  scourge  of  mankind — the  saving  activity 
in  its  Impairing  Form. 

Previous  to  the  panic  the  saving  activity  was  of  a 
different  character,  manifesting  itself  principally  in  the 
beneficent  Captalistic  Form,  in  the  creation  of  new  con- 
structions and  of  additional  wealth.  This,  its  proper  and 
desirable  sphere  of  action,  was  closed  to  it  by  the  panic, 
and  at  once  it  was  changed  from  a  source  of  good  to  a 
source  of  evil.  Not  finding  investment  any  longer  in  new 
constructions  (except  to  a  limited  extent),  the  savings 
funds  found  it  in  that  peculiar  manner  where  the  act  of 
investing  does  not  bring  with  it  a  demand  for  working 
forces,  and  where  the  services  of  the  latter  are  left  un- 
called for.  If  at  that  period  all  saving  activity  had 
ceased,  and  if  the  wealthy,  instead  of  continuing  to  ac- 


Prosperity  in  the   United  States.  143 

cumulate  part  of  their  income,  had  made  larger  expendi- 
tures for  luxuries,  a  corresponding  demand  for  working 
forces  would  have  ensued  and  the  depression  would  have 
ceased  at  once.  The  wealthy,  however,  did  not  pursue 
such  a  course;  the  saving  activity  went  on — therefore 
the  depression. 

True,  a  cessation  of  the  saving  activity,  though  it 
would  ha\re  done  incalculable  good,  would  not  have  re- 
lieved the  trouble  entirely,  for  the  large  foreign  indebt- 
edness still  existed  and  Europe  continued  its  demands 
for  payment  in  cash,  therewith  causing  a  steady  drain  of 
our  gold  supply.  This  drain  became  so  severe  that  at 
times  it  was  doubtful  as  to  whether  the  country's  cur- 
rency could  be  kept  on  a  gold  basis,  the  reduction  to  a 
silver  basis  seeming  imminent.  Only  the  strenuous  ef- 
forts of  the  Government,  aided  by  the  support  of  a  syn- 
dicate of  bankers,  saved  the  country  from  an  exhaustion 
of  its  gold,  supply  and  from  jeopardizing  its  gold 
standard. 

The  situation  became  still  more  complicated  by  the 
passage  of  a  measure  which,  though  commendable  in  it- 
self, was  of  doubtful  value  under  the  circumstances, 
namely,  the  enactment  of  a  law  for  reducing  the  tariff. 
The  lowering  of  the  duties  certainly  tended  to  facilitate 
imports  without  correspondingly  stimulating  exports — at 
least  not  for  the  time  being — and  the  result  of  this  tend- 
ency was  fully  disclosed  by  the  statistics,  inasmuch  as 
the  excess  of  exports  over  imports  fell  off  at  once,  being 
<mly  75  million  dollars  in  the  first  year  under  the  new 
tariff,  as  against  237  millions  in  the  preceding  year.  With 
all  due  respect  for  the  principle  of  free  trade,  it  should 
be  admitted  that  the  time  chosen  for  enacting  the  new 
tariff  was  inopportune,  rendering  the  country's  trade 
balance  so  much  the  worse  and  correspondingly  increas- 
ing the  drain  on  our  gold  supply. 


144  Recent   Ups  and  Downs  of 

The  foregoing  will  serve  to  show  the  far-reaching  in- 
fluence which  foreign  trade,  and  the  status  of  the  trade 
balance  resulting  therefrom,  may  exert  on  the  monetary 
and  economic  conditions  of  a  country.  Ordinarily  we 
find  no  monetary  strain  in  a  country  where  a  depression 
prevails,  that  is,  after  the  panic  has  subsided.  Nor  was 
such  a  strain  experienced  by  us;  nevertheless  a  constant 
anxiety  existed  about  the  money  situation  and  about  the 
question  whether  the  Government  would  be  able  to  main- 
tain gold  payments.  This  anxiety  undoubtedly  helped  to 
intensify  the  general  feeling  of  despondency  and  to  ac- 
centuate the  depression.  The  silver  inflation  alone  would 
not  have  been  sufficient  to  cause  that  drain  of  gold  and 
that  distrust  in  the  stability  of  our  monetary  standard 
unless  the  adverse  trade  balance  had  co-operated  with  it. 
The  silver  of  itself  will  not  expel  the  gold.  It  does  not 
do  so  in  France,  despite  the  great  volume  of  silver  circu- 
lating there.  France's  trade  balance  is  favorable,  so  she 
practically  has  not  to  make  any  cash  payments  abroad, 
and  there  is  no  drain  on  her  money  supply.  But  with  us 
the  situation  was  different.  We  had  to  make  large  pay- 
ments abroad  in  addition  to  what  we  paid  in  the  shape 
of  merchandise,  and  only  gold  was  accepted  in  settle- 
ment, so  our  gold  went  out  wrhile  the  silver  remained.  It 
seemed  as  if  the  gold  was  expelled  by  the  silver  cur- 
rency; in  reality  it  was  expelled  by  the  adverse  trade 
balance. 


Tt  should  be  understood  that  the  depression  which 
follows  a  panic  is  not  necessarily  coupled  with  an  ad- 
verse trade  balance  and  with  currency  troubles.  It  is  not 
so  in  England.  There  an  adverse  trade  balance  (i.  e.,  an 
unfavorable  balance  of  the  foreign  account")  is  practi- 
cally unknown ;  nor  is  the  currency  a  subject  of  concern 
except  at  times  of  acute  panic:  still,  periods  of  depres- 


Prosperity  in  the  United  States.  145 

sion  have  been  quite  frequent  there.  The  example  af- 
forded by  tho  United  States  in  those  memorable  years 
from  1893  to  1897  has  been  chosen  by  me  for  the  special 
purpose  of  illustrating  a  combination  of  those  three  im- 
portant factors  of  disturbance:  an  adverse  trade  balance, 
an  unfavorable  monetary  situation  resulting  therefrom, 
and  last  but  not 'least,  Impair  Savings,  the  latter  invari- 
ably constituting  the  governing  element  of  all  depres- 
sions. 

THE  RETURN  OF   PROSPERITY. 

While  it  was  the  drift  of  our  foreign  trade  which  pro- 
duced the  various  factors  of  disturbance  witnessed  dur- 
ing the  depression  of  1893  to  1897,  it  .was  a  change  in 
that  drift  which  put  an  end  to  our  troubles  and  opened 
the  gates  for  the  return  of  prosperity.  This  change  was 
effected  bv  two  memorable  events:  the  enactment  of  a 
new  tariff  law,  and  in  the  same  year,  1897,  an  unusually 
bountiful  harvest,  coupled  with  poor  crops  in  Europe, 
which  enabled  us  to  dispose  of  our  large  surplus  at  high 
prices.  In  consequence  the  excess  of  exports  over  im- 
ports rose  to  the  phenomenal  figure  of  $615,000,000  in 
the  year  1897-98,  part  of  which  was  paid  for  in  cash;  so 
the  efflux  of  gold  witnessed  in  the  preceding  years  was 
changed  into  an  influx,  and  the  drain  on  our  money  sup- 
ply came  to  an  end.  Owing  to  the  new  tariff,  the  imports 
of  merchandise  fell  off  as  much  as  $150,000,000  in  the 
year  1897-98,  compared  with  the  previous  year,  a  fact 
which  certainly  tended  to  stimulate  domestic  production. 
The  greater  activity  caused  thereby  as  'well  as  by  the 
largely  increased  exports,  resulted  in  swelling  the  peo- 
ple's income,  this  again  added  to  their  purchasing  power 
and  to  the  general  demand,  this  again  fostered  produc- 
tion still  more  and  therewith  created  an  enlarged  de- 
mand for  the  means  of  production,  thus  awakening  a 
spirit  of  enterprise.  Then  the  "Multiplying  Principle0 


146  Recent   Ups  and  Downs  of 

stepped  in — enterprise  and  new  constructions  calling  for 
additional  working  forces6,  and  these  in  turn,  when  ex- 
pending their  income,  giving  rise  to  a  more  extended  de- 
mand for  commodities;  in  other  words,  the  well-known 
principle  of  action  and  reaction  was  brought  into  play, 
which  did  the  rest  in  boosting  up  business  activity  to  the 
high-water  mark.  With  the  revival  of  enterprise  that 
malignant  factor,  "Impair  Savings/'  which  for  four 
years  had  clogged  the  wheels  of  prosperity,  disappeared, 
the  character  of  the  saving  process  being  transformed 
from  the  harmful  to  the  beneficent  type,  from  the  Im- 
pairing to  the  Capitalistic  Form. 

The  remarkably  favorable  trade  balance  recorded  in 
the  year  1897-98  fell  oft'  somewhat  in  the  subsequent 
years,  but  nevertheless  continued  at  a  very  high  average; 
this  for  two  reasons:  first,  the  hard  times  from  1893  to 
1897  had  resulted  in  depressing  all  wages  and  prices  ow- 
ing to  severe  competition  among  working  men  and  busi- 
ness men,  thus  enabling  us  to  produce  our  wares  at  lower 
cost,  so  as  to  compete  with  Europe  in  many  lines  of  man- 
ufacture; second,  the  protection  afforded  by  the  high 
tariff  of  1897  which  so  largely  excluded  foreign  goods 
from  our  markets  stimulated  home  production  and, 
strange  to  say,  Europe  acquiesced  in  this  policy  of  ex- 
clusion and  refrained  from  adopting  retaliatory  meas- 
ures. 

It  has  often  been  stated  that  if  we  want  to  sell  to 
other  nations  we  must  buy  from  them,  the  one  depending 
upon  the  other.  There  seem  to  be  some  flaws  in  that 
theory,  however,  for  our  own  experience  during  that 
period  demonstrates  that  we  could  manage  to  increase 
our  sales  at  the  same  time  that  we  reduced  our  pur- 
chases. True,  this  one-sided  policy  may  not  work  in  the 
long  run.  but  it  answered  very  well  for  the  time  being. 
It  did  not  result  in  a  shrinkage  of  exports;  on  the  other 


Prosperity   in  the   United  States.  147 

hand,  it  broadened  the  home  market  for  the  sale  of  our 
own  products,  which,  in  addition  to  the  energetic  exploi- 
tation of  our  immense  natural  resources,  afforded  em- 
ployment for  our  working  forces  to  an  extent  never 
known  before.  Where  all  working  forces  find  employ- 
ment and  where  they  are  aided  by  the  best  possible 
means  of  production,  prosperity  evidently  must  be  at  its 
maximum. 

COMPLICATIONS  DUE  TO  FOREIGN  TRADE. 

In  course  of  time,  however,  the  one-sided  policy  re- 
ferred to  led  to  consequences  which  were  not  foreseen 
when  enacting  the  high  tariff  of  1897.  The  latter  harbors 
an  element  of  mischief  which  has  made  itself  felt  more 
and  more  in  recent  year?.  It  helps  to  raise  all  prices  and 
wages,  because  it  excludes  the  leveling  influence  of  for- 
eign competition.  The  rise  of  prices  means  a  weakening 
of  our  position  in  international  trade,  rendering  our 
market  a  better  one  for  foreigners  to  sell  in  and  a  poorer 
one  to  buy  in. 

True,  this  tendency  has  not  so  far  manifested  itself  in 
the  shape  of  reducing  our  exports,  which  indeed  are  con- 
stantly growing;  but  the  imports  have  been  growing 
much  faster  (up  to  the  fall  of  3907),  and  in  consequence 
we  see  a  gradual  shrinkage  in  the  excess  of  exports  over 
imports,  and  a  waning  of  our  favorable  trade  balance. 

This  shrinkage  of  the  trade  balance  would  do  no 
harm  and  might  be  regarded  by  us  with  complacency 
were  we  situated  as  favorably  in  this  regard  as  England, 
Germany  or  France*,  or  if  only  we  could  come  out  even 
in  our  international  trade,  without  augmenting  our  for- 
eign indebtedness.  But  the  fact  is  we  have  already 

*  In  those  countries  the  trade  balance  is  apparently  on  the  wrong- 
side,  showing  an  excess  of  imports,  which,  however,  they  can  very 
well  afford  to  pay  for  out  of  the  income  derived  from  their  foreign 
investments. 


148  Recent   Ups  and  Downs  of 

reached  a  stance  where,  despite  the  large  balance  of  trade 
still  running  in  our  favor,  imbalance  of  payments  turns 
out  against  us — a  fact  clearly  evidenced  by  our  appear- 
ance as  persistent  borrowers  in  the  London  money 
market. 

What  becomes  of  the  large  excess  of  our  exports? 
Though  not  so  large  as  in  the  years  1897  to  1901,  it  has 
still  been  averaging  over  400  millions  annually  in  recent 
years.  Only  a  part  of  this  amount  is  absorbed  by  inter- 
est on  our  foreign  indebtedness,  by  ocean  freights,  ex- 
penditures of  American  tourists,  etc.  The  remainder  is 
probably  absorbed  by  smuggling  (especially  of  precious 
stones),  undervaluations  at  the  custom  houses,  and  pos- 
sibly by  errors  in  gathering  the  statistics.  Be  this  as  it 
may,  the  fact  remains  that  whenever  our  excess  of  ex- 
ports falls  much  below  450  millions  per  annum,  our  bor- 
rowings in  London  (in  the  shape  of  finance  bills  and  of 
contangoes  on  American  securities)  seem  to  increase. 

Such  being  the  present  situation,  and  the  probability 
looming  up  before  us  that  our  trade  balances  will  dimin- 
ish more  rapidly  hereafter,  we  may  well  ask  the  ques- 
tion, Where  are  we  drifting?* 

We  might  keep  on  borrowing  from  Europe,  and 
might  continue  to  place  large  bonded  loans  abroad  (such 
as  were  recently  negotiated  in  the  French  market  by 
some  of  our  prominent  railroads,  and  even  by  the  City 
of  New  York)  and  in  this  way  meet  the  annual  deficit 
growing  out  of  our  foreign  trade.  Such  a  policy,  how- 
ever, would  only  serve  to  bridge  us  over  the  present,  and 
would  render  the  final  adjustment  all  the  more  distress- 


*  After  the  panic  of  1907  set  in,  a  remarkable  change  in  the 
trade  balance  took  place,  exports  increasing  and  imports  diminishing 
— a  change  which  averts  any  troubles  from  that  source  for  the  time 
being,  and  therefore  is  proving  a  considerable  help  towards  the 
process  of  recuperation.  It  remains  to  be  seen  whether  this  favor- 
able trade  balance  will  last — at  least  to  an  extent  that  will  prevent 
a  recurrence  of  such  an  unfortunate  state  of  our  foreign  account  as 
•we  experienced  in  the  period  from  1893  to  1897. 


Prosperity  in  the   United  States.  149 

ing,  this  aside  from  the  fact  that  our  position  would  be- 
come more  precarious  as  we  go  along,  since  Europe 
might  at  any  time  cease  to  take  our  securities — an  event- 
uality which  is  bound  to  happen  sooner  or  later.  Already 
the  London  bankers  have  at  times'  been  discriminating 
against  our  securities,  charging  as  much  as  8  and  9  per 
cent,  on  American  contangoes. 

It  may  be  that  history  will  repeat  itself.  The  troubles 
we  experienced  in  those  hard  years  1893  to  1897  resulted 
largely  from  our  adverse  trade  balance  and  our  growing 
foreign  indebtedness.  Precisely  the  same  conditions  seem 
to  be  developing  at  present,  and  they  may  lead  to  the 
same  end — unless  the  drift  of  events  takes  a  turn  which 
changes  the  position. 


Thus  we  find  that  though  our  high  protective  tariff  of 
1897  effected  an  almost  magical  transformation  from  de- 
pression to  prosperity,  its  after  effects  will  breed  trouble. 
It  restricted  imports  for  a  time;  on  the  other  hand  it 
helped  to  raise  all  wages  and  prices,  thus  gradually  fa- 
cilitating European  competition  in  our  markets  despite 
the  barrier  erected  by  the  high  tariff.  Had  the  moderate 
duties  of  1894  remained  in  force,  the  change  in  our  for- 
tunes would  have  been  less  spectacular,  but  of  a  healthier 
character.  Our  surplus  trade  balance,  though  reduced  to 
75  millions  in  the  first  year  under  the  low  tariff  of  1894, 
rose  to  102  millions  in  the  second  and  to  286  millions  in 
the  third,  and  most  likely  it  would  have  kept  on  growing 
had  the  tariff  been  left  undisturbed,  perhaps  to  figures 
as  large  as  those  reached  under  the  high  tariff  of  1897. 
At  the  same  time  the  leveling  influence  of  foreign  com- 
petition would  have  prevented  domestic  prices  and  wages 
from  rising  to  such  figures  as  they  did. 

The  sentiment  in  favor  of  lowering  the  tariff  has  of 
late  become  more  pronounced.  Possibly,  however,  a  de- 


150  Recent   Ups  and  Downs  of 

cided  move  in  this  direction  may  prove  as  inopportune 
as  it  was  in  1894;  it  would,  for  a  time  at  least,  still  fur- 
ther reduce  our  already  diminishing  trade  balance. 

THE  RELATIVE  SCARCITY  OF  CURRENCY. 

In  the  foregoing  pages  I  have  dwelt  at  some  length 
on  the  subject  of  foreign  trade,  and  have  pointed  out 
that  the  harm  arising  from  our  unfavorable  trade  bal- 
ance (or,  more  properly  speaking,  our  unfavorable  bal- 
ance of  pa3rments)  consists  not  so  much  of  the  annual 
tribute  we  have  to  pay  to  Europe  in  the  shape  of  an  ex- 
cess of  exports  over  imports — for  which  excess  we  get  no 
returns — as  of  the  possible  reaction  upon  our  monetary 
position.  It  should  be  well  understood,  however,  that 
the  latter  does  not  depend  entirely,  nor  even  chiefly, 
upon  the  state  of  our  foreign  trade,  but  is  influenced  to  a 
much  greater  extent  by  domestic  factors — labor  unions, 
trade  combinations,  and  last  but  not  least  by  the  annual 
additions  to  the  volume  of  "bank  money5 ". 

As  to  labor  unions  and  trusts,  I  have  mentioned  on 
page  129  that  they  are  ever  trying  to  advance  wages  on 
the  one  hand  and  prices  on  the  other,  without  in  the 
least  considering  whether  the  country's  money  supply  is 
adequate  to  stand  the  added  strain  imposed  upon  it  by 
such  advances.  Obviously,  the  higher  the  average  of 
wages  and  prices,  the  greater  ought  to  be  the  money  sup- 
ply needed  to  transact  the  country's  business.  In  a  way, 
therefore,  the  efforts  of  those  combinations  resulted  in  a 
reduction  of  our  country's  money  supply — not  in  its  vol- 
ume but  in  its  buying  power.  In  this  sense  the  effect 
upon  the  money  volume  was  almost  the  same  as  if  part 
of  it  had  been  blotted  out  of  existence. 

To  a  large  extent  the  lessened  purchasing  power  of 
the  currency  in  circulation  was  compensated  for  by  addi- 
tions to  its  volume.  But  these  additions  fell  short  of  the 


Prosperity  in  the  United  States.  151 

increasing  requirements  of  the  country.  The  total  circu- 
lation (outside  the  Treasury)  rose  from  1,640  millions  in 
1897  to  2,772  millions  in  1907.  an  increase  of  about  1,100 
millions.  This  additional  supply  of  1,100  millions  had  to 
meet  a  number  of  new  demands  upon  the  currency, 
caused  by  various  factors,  four  of  them  paramount  in 
importance:  first,  the  growth  of  population;  second,  the 
extraordinary  business  activity;  third,  the  rise  of  all 
wages  and  prices,  calling  for  more  currency  in  each  in- 
dividual transaction;  fourth,  the  enlarged  cash  needs  of 
the  banks  for  reserve  purposes.  The  absorption  of  money 
for  the  latter  purpose  has  not  received  much  attention 
on  the  part  of  economists,  but  its  importance  will  be 
readily  understood  when  we  consider  that  out  of  the 
total  circulation  of  about  2,700  millions  (in  July,  1907) 
there  was  over  a  billion  locked  up  by  the  banks,  leaving 
only  1,700  millions  in  actual  hand-to-hand  circulation. 
Of  the  1,100  millions  added  to  the  currency  between  1897 
and  1907,  over  one-half  was  absorbed  by  the  banks  for 
reserve  purposes,  during  the  same  period,  leaving  only 
the  smaller  portion  to  meet  the  other  three  demands 
mentioned  above,  those  consequent  upon  the  increase  of 
population,  of  business  activity,  and  of  wages  and  prices. 
This  proved  insufficient  for  the  requirements. 

Nevertheless,  we  experienced  no  actual  dearth  of  cur- 
rency, at  least  not  in  the  channels  of  production  and 
trade;  this  on  account  of  the  great  expansion  in  the  vol- 
ume of  "bank  money5",  which  to  a  certain  extent  took 
the  place  of  currency,  and  is,  in  fact,  coming  more  and 
more  into  use  for  some  classes  of  payments  where  for- 
merly currency  was  employed.  This  substitution,  how- 
ever, progresses  but  slowly,  and  on  the  whole  the  fact 
remains  that  for  the  payment  of  wages  and  for  the  pur- 
poses of  the  retail  trade,  currency  is  the  thing  needed. 

Another  reason  which  prevented  an  actual  dearth  of 


152  Recent  Ups  and  Downs  of 

currency  in  the  channels  of  production  and  trade  must 
be  found  in  the  fact  that  the  bank  money5,  of  which  an 
ample  supply  existed  in  the  hands  of  business  men,  could 
readily  be  changed  into  cash,  the  banks  being  under 
compulsion  to  make  such  exchange  whenever  demanded, 
even  where  they  encountered  difficulty  in  procuring  the 
necessary  cash  and  often  had  to  encroach  upon  their 
legal  reserves  in  doing  so.  Business  men,  therefore,  met 
no  difficulty  in  procuring  the  currency  they  needed,  so 
long  as  they  commanded  a  supply  of  "money  in  bank." 
But  a  peculiar  situation  developed  in  consequence — on 
the  one  hand,  monetary  ease  prevailing  in  the  channels 
of  production  and  trade,  and  on  the  other  a  constant 
dearth  of  funds  on  the  part  of  the  banks,  who  found  it 
difficult  to  keep  their  legal  reserves  intact  whenever  their 
depositors,  who  needed  the  money  for  purposes  of  their 
current  business,  had  to  withdraw  more  of  it  than  the 
banks  could  well  afford  to  spare.  In  addition  to  frequent 
embarrassments  from  this  source,  they  were  exposed  to 
a  continuous  pressure  on  the  part  of  borrowers  clamoring 
for  loan  accommodations  far  in  excess  of  what  the  banks 
could  grant — not  so  much  for  purposes  of  production 
and  trade  (demands  which  the  banks  generally  consid- 
ered as  having  precedence  over  others)  as  for  purposes 
of  permanent  investment,  in  the  shape  of  loans  on  bonds, 
stocks,  mortgages,  etc. 

Owing  to  this  double  strain,  the  free  funds  of  the 
commercial  banks  ran  down  in  an  alarming  degree.  The 
banks  naturally  extracted  from  the  general  circulation  as 
much  money  as  they  were  able  to  retain,  so  there  was  no 
more  in  circulation  than  actually  needed.  And  whatever 
cash  they  could  manage  to  retain  was  used  by  them,  al- 
most to  the  last  dollar,  for  reserve  purposes,  as  a  basis 
for  building  up  additional  credits.  The  extent  to  which 
*his  was  carried  on  may  be  inferred  from  certain  figures 


Prosperity  in  the   United  States.  153 

given  in  Government  reports,  according  to  which  the  re- 
serves held  by  the  National  Banks  underwent  the  follow- 
ing change:  in  1899  they  formed  about  30  per  cent,  of 
the  total  of  the  "deposits"-  in  1906,  only  20  per  cent. 
This  does  not  mean  that  the  funds  of  the  banks  dimin- 
ished in  their  sum  total,  which  on  the  contrary  rose  con- 
siderably; but  the  structure  of  credits  (and  therewith  of 
"deposits")  soared  to  such  a  gigantic  height  that  the 
banks'  cash  funds,  despite  their  much  larger  aggregate, 
showed  a  smaller  ratio  when  compared  with  the  deposits. 

The  commercial  banks  managed  to  build  up  that 
structure  of  credit  higher  from  year  to  year,  notwith- 
standing the  difficulty  they  met  in  gathering  cash  funds 
for  reserve  purposes,  where  the  depositors  withdrew  the 
money  about  as  fast  as  the  banks  tried  to  accumulate  it. 
On  the  whole,  however,  the  banks  found  themselves  much 
hampered  by  this  scarcity  of  cash  (which,  I  repeat,  was 
experienced  by  them  only,  not  by  the  business  man), 
otherwise  the  piling  up  of  credits  would  have  gone  on 
still  faster  than  it  did.  In  this  connection  I  may  mention 
the  fact  that  the  New  York  banks,  which  are  bound  to 
keep  a  cash  reserve  of  25  per  cent.,  have  been  unable, 
from  190-1  to  1907,  to  increase  their  loans  and  therewith 
their  deposits,  despite  the  great  demand  for  loan  accom- 
modation ;  such  increase  of  loans  as  did  take  place  in  the 
United  States  being  confined  chiefly  to  country  banks, 
where  the  reserve  of  actual  cash,  as  fixed  by  law,  need 
not  exceed  6  per  cent. 

Owing  to  the  great  demand  for  cash  capital  and  loans 
on  the  one  hand  and  the  dwindling  of  free  loanable  cash 
funds  on  the  other,  the  condition  of  the  money  market 
grew  more  and  more  precarious.  While  the  money  sup- 
ply certainly  was  ample  to  meet  all  reasonable  demands, 
a  growing  disproportion  developed  between  the  two 
classes  of  the  money  supply,  currency,  and  "bank 


154  Recent   Ups  and  Downs  of 

money5".  The  volume  of  the  latter  had  been  swelling 
prodigiously,  from  3,109  millions  in  1897  to  9,602  mil- 
lions in  1907.  To  maintain  a  proper  proportion  the  cur- 
rency should  have  been  expanding  in  the  same  ratio, 
which,  however,  it  did  not  do,  and  such  increase  of  it  as 
did  take  place  was  largely  absorbed  by  the  banks  for  re- 
serve purposes,  as  explained  further  above.  On  account 
of  this  growing  disproportion  the  bank  money  finally 
was  unable  to  keep  up  its  par  value  with  the  currency,  a 
development  which  at  once  engendered  general  distrust 
and  led  to  the  crash. 

UNHEALTHY  BASIS  OF  THE  BANK  MONEY. 

The  prodigious  growth  of  bank  money5  which  took 
place  during  the  period  mentioned,  forms  a  striking 
characteristic  of  the  recent  developments  in  the  United 
States.  That  growth  was  due,  as  already  stated,  to  the 
fact  that  the  commercial  banks  (the  creators  of  the  bank 
money)  did  not  confine  their  loans  to  the  legitimate 
sphere,  the  discounting  of  commercial  paper,  but  largely 
branched  out  into  the  field  of  permanent  investment — 
making  loans  on  bonds,  stocks,  mortgages,,  etc.*  Of  the 
total  bank  money  (about  nine  billions  in  1907)  only  the 
smaller  part  originates  from  loans  made  on  commercial 
paper,  the  larger  part  having  been  issued  on  the  basis 
of  the  above-mentioned  securities.  Nominally,  it  is  true, 
the  latter  class  of  loans  are  not  of  a  permanent  nature, 
being  generally  put  out  *'oii  call,"  or  on  short  time, 
which  gives  them  the  appearance  of  being  of  a  tempo- 
rary character,  especially  so  as  the  funds  thus  loaned  out 


*  Such  loans,  as  a  rule,  are  not  issued  direct  to  the  railroads  or 
the  industries  needing  the  funds,  yet  they  are  indirectly.  Suppose  a 
railroad  makes  a  bond  issue  with  the  help  of  a  banker,  the  latter 
inviting  the  investing  public  to  subscribe  to  the  bonds;  then  the 
public  as  well  as  the  banker  will  largely  depend  upon  the  banks  to 
make  advances  on  the  bonds  so  issued.  Thus  the  funds  advanced  by 
the  banks  really  come  to  be  used  for  permanent  investment  in  the 
railroad. 


Prosperity   in   Hie   United  States.  155 

by  the  banks  constantly  revert  to  them.  In  reality, 
however,  the  loans  constitute  permanent  investments, 
for  their  aggregate  does  not  diminish,  expanding  rather 
than  contracting,  and  the  maturing  loans  being  paid  off 
by  making  new  ones,  shifting  them  from  one  bank  to  the 
other  and  from  one  holder  of  the  securities  to  the  other. 
The  money  needed  to  pay  them  off  for  good  (over  five 
billions  of  investment  loans  and  over  nine  billions  of  all 
classes)  is  not  in  existence — see  footnote  on  page  17. 

A  peculiar  characteristic  of  the  bank  loans,  and  one 
but  little  understood  by  economists,  consists  of  the  fact 
that  they  become  money  (bank  money)  after  serving 
their  primary  purpose  of  furnishing  cash  capital  to  the 
borrower.  The  latter  generally  does  not  withdraw  the 
amount  of  the  credit  in  the  shape  of  currency,  but  merely 
transfers  the  title  to  it  to  other  persons,  and  each  of 
these,  in  fact  every  man  in  the  community,  will  treat 
such  transfers  of  bank  credit  the  same  as  payments  in 
money.  Thus  the  mere  title,  i.  e.,  the  mere  right  to  draw 
money  against  the  credit,  becomes  money,  owing  to  the 
tacit  understanding  among  business  men  to  consider 
these  rights  as  money.  And  the  multiplication  of  these 
rights  has,  to  precisely  the  same  extent,  augmented  our 
money  supply.  The  larger  the  aggregate  of  the  loans  of 
the  commercial  banks  outstanding  at  any  one  time,  the 
larger  the  aggregate  of  these  rights,  i.  e.  of  bank  money, 
and  the  larger  the  country's  money  volume. 

I  mention  (though  it  is  well  understood)  that  a  man 
who  procures  a  loan  from  a  bank  generally  borrows  the 
funds  to  pay  them  out  to  others,  while  those  others,  who 
thus  become  the  owners  of  the  borrowed  bank  money, 
are  not  the  borrowers. 

It  may  seem  unusual  to  count  these  bank  credits  as 
a  part  of  the  country's  money  supply.  A  business  man, 
however,  will  count  his  "bank  money"  as  cash  on  hand, 


156  Recent  Ups  and  Downs  of 

just  the  same  as  the  currency  in  his  safe  or  in  hip.  till. 
This  is  true  of  the  deposits  in  National  banks,  State 
banks  and  Trust  banks,  bat  does  not  apply  to  those  in 
Savings  banks  (see  footnote,  page  20). 

I  repeat,  two  classes  of  loans  have  contributed  to 
build  up  the  enormous  extension  of  bank  money  from 
3.100  millions  in  1897  to  9,600  millions  in  1907;  first,  the 
loans  issued  by  the  commercial  banks  on  the  strength  of 
commercial  paper,  backed  by  merchandise  and  to  be  re- 
deemed out  of  the  proceeds  of  the  sale  of  the  merchan- 
dise; second,  loans  issued  on  bonds,  stocks,  etc.,  the  pro- 
ceeds of  which  loans  generally  found  their  way  into  in- 
vestments of  a  permanent  character,  i.  e.  in  new  con- 
structions. These  loans  cannot  be  cancelled  or  reduced 
in  their  aggregate  except  by  the  tedious  saving  process. 
Without  this  latter  class  of  loans  that  prodigious  volume 
of  bank  money  would  not  be  half  of  what  it  is  and  would 
not  have  constituted  that  element  of  danger  which  finally 
led  to  the  collapse. 

EXCESSIVE  VOLUME  OF  BANK  MONEY,  YET  A 
DEARTH  OF  CASH  CAPITAL. 

It  may  seem  contradictory  that  at  a  time  where  the 
volume  of  bank  money5  had  attained  such  a  gigantic 
size,  representing  so  much  "liquid  capital"  in  the  hands 
of  business  men,  there  should  have  been  that  extreme 
dearth  of  cash  capital  which  was  really  witnessed.  This 
seeming  contradiction  is  partly  explained  by  another  pe- 
culiar characteristic  of  bank  loans  (likewise  overlooked 
by  most  of  our  economists),  namely,  that  they  can  be 
used  for  investment  purposes  only  once.  If  their  aggre- 
gate increases  by  one  billion  dollars,  this  amount  of  new 
credit  money  will  supply  the  funds  for  building  up  new 
constructions  of  an  equal  value,  but  no  more.  Having 
once  been  used  for  that  purpose,  the  bank  loans  become 


Prosperity  in  the   United  States.  157 

"Business  Money."  Though  originally  entering  the 
money  market  in  the  shape  of  cash  capital,  available  for 
investment,  they  cease  to  be  such  as  soon  as  they  are  in- 
vested. To  make  this  clear  let  us  suppose  that  a  rail- 
road needs  funds  in  order  to  make  some  improvements, 
and  issues  bonds  which  its  banker  pledges  with  some 
commercial  bank,  the  latter  advancing  the  funds  in  the 
shape  of  bank  credits.  Let  us  further  suppose  that  out 
of  this  credit  (bank  money)  a  sum  of  $1,000  be  trans- 
ferred to  a  builder.  Does  this  amount  represent  loanable 
or  investable  cash  capital  in  the  hands  of  the  builder? 
Certainly  not.  He  needs  that  money  to  make  payments 
for  material  and  labor,  only  a  fraction  remaining  for  his 
profit.  The  $1,000  has  become  Business  Money  by  being 
transferred  to  the  builder,  and  when  he  transfers  it  to 
others  it  remains  Business  Money,  the  same  as  practi- 
cally all  bank  loans.  Every  new  owner  needs  it  for  use 
in  his  current  business,  and  can  not  apply  it  to  purposes 
of  permanent  investment  except  to  the  extent  that  he 
makes  savings  out  of  his  income.  Then,  however,  the 
funds  employed  in  such  investment  would  no  longer  be 
derived  from  bank  credits,  but  from  savings — evidenc- 
ing the  fact  that  bank  credits,  when  once  invested,  can 
not  be  used  again  for  investment  purposes,  and  explain- 
ing why,  in  spite  of  that  immense  volume  of  nine  billion 
dollars  of  bank  money,  all  of  which  counts  as  cash,  and 
originally  appeared  as  cash  capital  in  the  money  mar- 
ket, the  latter  was  left  bare. 

In  this  connection  I  remind  the  reader  of  the  sharp 
distinction  we  have  to  make  between  cash  capital  avail- 
able for  investment  (funds  which  actually  constitute 
the  money  market),  and  the  cash  funds  which  constitute 
the  business  men's  working  capital.  These  have  already 
found  investment,  and  though  they  may  seemingly  be 
idle  for  a  time,  they  are  needed  by  the  owner  for  the  pur- 


158  Recent   Ups  and  Downs  of 

pose  of  carrying  on  his  regular  business,  so  he  neither 
could  afford  to  loan  them  out  nor  to  invest  them  in  some 
enterprise.  Practically  all  of  the  nine  billions  of  bank 
money  falls  within  this  second  classification,  very  little 
of  it  representing  cash  capital  available  for  investment. 

CAUSES  OF  THE  DEARTH  OF  CASH  CAPITAL. 

The  abnormal  scarcity  of  cash  capital  available  for 
the  demands  of  the  money  market,  going  hand  in  hand 
with  the  tremendous  growth  of  cash  funds  in  the  shape 
of  bank  money — seemingly  a  paradoxical  combination — 
presents  one  of  the  most  conspicuous  features  of  the 
recent  economic  history  of  the  United  States.  What  was 
the  reason  of  the  constant  tightness  of  the  money  market 
and  of  that  extreme  dearth  of  cash  capital  in  the  years 
preceding  the  panic  of  1907?  We  can  conceive  of  two 
causes;  either  the  demand  for  cash  capital  was  excessive, 
or  the  annual  supply  of  new  cash  capital  was  too  small. 
Some  economists  prefer  the  latter  explanation.  They 
speak  of  extravagance  on  the  part  of  the  people,  of  too 
much  luxury  and  good  living,  arid  of  the  consequent  lack 
of  saving  power;  too  much  of  the  people's  income  being 
spent,  too  little  saved.  As  a  matter  of  fact,  however, 
there  was  never  more  saving  and  accumulating  going  on 
than  in  the  years  preceding  the  collapse. 

Let  us  take  a  glance  at  the  Chart.  It  represents  the 
money  market  in  the  shape  of  the  Black  Central  Field, 
and  it  shows  the  two  sources  whence  the  funds  come  to 
build  up  the  money  market :  first,  the  red  lines  10  and  11, 
standing  for  savings  or  surplus  earnings,  of  a  net  aggre- 
gate of  perhaps  3  or  4  billions  per  annum  (see  page  115) ; 
second,  the  red-and-black  line  18,  standing  for  the  aug- 
mentation of  bank  money,  which  for  the  five  years  1902 
to  1907  averaged  about  600  millions  per  annum.  Never 
before,  in  the  history  of  this  or  any  other  country,  has 


Prosperity  in  the   United  States.  159 

the  annual  supply  of  cash  capital  attained  such  propor- 
tions— and  the  fact  that  cash  capital  of  such  magnitude 
actually  did  accrue,  is  evidenced  by  the  visible  conse- 
quences— by  the  concurrent  increase  of  the  country's 
tangible  wealth  to  a  like  extent,  shown  by  recent  statis- 
tics. So  the  assumption  referred  to  above,  that  the  an- 
nual supply  of  new  cash  capital  was  too  scant,  proves 
incorrect.  In  fact  it  was  quite  large.  But  the  demands 
for  new  capital  were  still  larger.  All  of  the  funds  de- 
rived from  those  two  sources  were  readily  absorbed  for 
investment  purposes,  such  as  are  represented  in  the  Chart 
by  lines  12,  14,  15A,  15B,  15C,  and  16;  i.  e.,  in  such  ways 
as  lead  to  the  creation  of  new  property  and  to  the  exten- 
sion of  the  country's  wealth. 

If  we  find  that  the  dearth  in  the  money  market  pre- 
vailing in  the  years  1905,  1906  and  1907  must  be  Ascribed, 
not  to  the  scantiness  of  the  stream  of  new  cash  capital 
flowing  in  every  year,  but  to  the  abnormally  great  de- 
mand for  cash  capital,  which  far  exceeded  the  supply, 
the  question  arises,  What  caused  this  abnormal  demand? 

It  was  intimately  connected  with  the  country's  great 
prosperity. 

And  this  prosperity  hinged  largely  upon  the  abun- 
dance of  opportunities*  for  enterprise  and  new  construc- 
tions. The  latter  gave  employment  to  working  forces 
outside  of  those  regularly  engaged  in  production  and 
trade;  not  only  employment,  but  also  income.  This  in- 
come meant  increased  purchasing  power;  this,  increased 
demand  for  commodities;  this,  increased  production  of 
commodities;  this,  increased  demand  for  the  means  of 
production,  factories,  railroads,  etc.,  and  this,  again,  ex- 

*  On  page  161  it  will  be  shown  that  the  great  prosperity  resulted 
not  only  from  the  existence  of  abundant  opportunities  for  enterprise, 
but  also  from  an  inflation  of  the  bank  money.  The  latter,  however, 
could  hardly  have  grown  to  the  excessive  extent  stated  on  page  154 
without  the  co-operation  of  the  factor  above-mentioned — the  ample 
opportunities  for  investment. 


160  Recent   Ups  and  Downs  of 

tended  still  more  the  opportunities  for  profitable  enter- 
prise. This  well-known  inter-play  of  action  and  reaction 
was  further  stimulated  by  the  rapid  growth  of  popula- 
tion, which  of  itself  extended  the  demand  for  commod- 
ities, therewith  again  enlarging  the  demand  for  the  means 
of  production,  i.  e.,  for  new  constructions.  And  all  these 
new  constructions,  inasmuch  as  they  called  for  more  cash 
capital  per  annum  than  was  accruing  from  the  two 
sources  mentioned — savings  on  the  one  hand  and  in- 
crease of  credit  money  on  the  other — did  their  part  in 
promoting  that  insatiable  demand  for  more  and  more 
cash  funds,  stimulating  the  issue  of  bank  loans,  and 
therewith  the  excessive  creation  of  bank  money. 

INFLATION  AND    DEPRECIATION. 

In  course  of  time  the  rapid  inflation  of  the  money 
volume — partly  in  the  shape  of  coin  and  bank  notes,  but 
overwhelmingly  in  the  shape  of  bank  money5 — developed 
mischief  of  a  peculiar  kind.  It  not  only  made  possible 
the  constant  rise  of  wages  and  prices  contended  for  by  the 
labor  unions  and  trusts,  but  harbored  a  distinct  tendency 
of  its  own  in  the  same  direction,  thus  still  further  increas- 
ing wages  and  prices. 

To  explain  the  nature  of  this  peculiar  tendency  let  us 
assume,  for  the  sake  of  illustration,  that  all  working 
forces6  in  the  United  States  earn  20  billion  dollars  per 
annum.  When  they  expend  this  income,  mostly  for  con- 
sump  tibles  and  partly  for  the  creation  of  permanent  cap- 
ital, they  will  bring  a  demand  for  working  forces  into 
the  market  which  likewise  amounts  to  20  billions.  Let 
us  assume  furthermore  that  this  demand  suffices  to  em- 
ploy all  available  working  forces  of  the  country;  also 
that  the  existing  money  supply  is  just  sufficient  to 
transact  the  country's  business.  Now  suppose  that  the 
money  volume  were  augmented  by  one  billion  dollars 


Prosperity  in  the   United  States.  161 

in  the  course  of  a  year,  in  the  shape  of  bank-money ; 
what  will  be  the  consequence!  This  additional  money, 
which  enters  the  market  as  cash  capital,  can  be  used  for 
new  constructions  and  for  commercial  enterprise  just 
the  same  as  cash  capital  accruing:  from  the  saving  pro 
cess,  see  page  23,  and  the  business  men  borrowing  such 
cash  funds  from  the  banks  will  surely  so  use  them— 
otherwise  there  would  be  no  object  in  borrowing.  If  so 
applied,  the  money  will  be  turned  into  income  for  work- 
ing men  and  business  men  and  will  create  a  demand  for 
working  forces  to  the  extent  of  one  billion  dollars,  this 
in  addition  to  the  normal  demand.  The  latter,  accord- 
ing to  our  assumption,  amounts  to  20  billions,  and  ab- 
sorbs all  working  forces  of  the  country.  Where  the  nor- 
mal demand  fully  employs  these,  can  the  additional  de- 
mand, due  to  the  expenditure  of  the  additional  billion 
dollars,  employ  more  of  them — i.  e.,  more  working  forces 
than  there  are?  If  not,  will  not  the  demand  due  to  that 
additional  expenditure  simply  result  in  raising  wages 
and  prices,  without  increasing  the  output? 

The  answer  to  this  question  may  readily  be  found  in 
the  great  delay  in  having  orders  tilled  and  in  the  scarcity 
of  labor  which  prevailed  in  the  years  preceding  the  col- 
lapse. Such  scarcity,  of  itself,  inevitably  tends  to  raise 
wages,  and  therewith  prices — which  means  a  depreciation 
of  the  money  supply.  In  other  words,  the  great  increase 
in  our  money  volume  was  largely  swallowed  by  deprecia- 
tion; bearing  out  the  statement  made  on  page  129,  that 
where  the  money  volume  expands,  the  country's  mone- 
tary requirements  will  gradually  adjust  themselves  to 
the  larger  volume. 

INFLATION  THE  MOVING  FACTOR. 

In  the  foregoing  sub-chapters  several  factors  have 
been  considered  which  played  their  part  in  shaping  the 


162  Recent   Ups  and  Downs  of 

peculiar  economic  development  in  the  United  States  from 
1897  to  1907 — the  great  prosperity — the  unusual  demand 
for  commodities  as  evidenced  by  the  delay  in  having 
orders  filled  and  by  the  scarcity  of  labor — the  dearth  of 
cash  capital — the  aggressions  of  labor  unions  and  trusts 
—the  growing  depreciation  of  the  money's  purchasing 
power,  resulting  from  the  steady  increase  of  wages  and 
prices.  The  moving  factor  for  all  of  these  phenomena 
must  be  found  in  the  unprecedented  inflation  of  the  bank 
money5.  This  factor  should  be  held  responsible  for  the 
excessive,  over-strained  business  activity  of  that  period, 
as  well  as  for  the  subsequent  collapse.  Inflation  was  the 
cause  of  both. 

Most  of  our  economists  are  not  inclined  to  admit  the 
inflationary  character  of  the  expansion  of  the  bank 
money  and  prefer  to  believe  the  great  swelling  of  its 
volume  to  be  harmless,  on  the  plea  of  its  being  self- 
adjusting — expanding  and  shrinking  according  to  the  de- 
mands of  trade ;  and  the  great  expansion  during  the  time 
of  the  boom  simply  being  due  to  the  great  demand  for 
purposes  of  trade.  It  escaped  their  attention  that  it  was 
the  inflation  itself  which  created  this  demand. 

How  this  was  done  has  been  explained  on  page  161. 
And  in  the  several  preceding  sub-chapters  I  have  al- 
ready pointed  out  how  most  of  the  phenomena  enum- 
erated above  originated  from  the  inflation.  Can  we  like- 
wise attribute  the  dearth  of  cash  capital  to  that  cause? 
As  it  were,  could  the  undue  increase  of  the  bank  money 
cause  a  scarcity  of  the  bank  money? 

It  certainly  can,  paradoxical  as  it  may  seem.  True, 
at  first  the  increase  will  tend  to  relieve  the  strain  on  the 
money  market.  The  increase  of  the  total  of  the  bank 
money  by  one  billion  will  satisfy  the  demand  for  cash 
funds  to  an  equivalent  extent.  But  what  will  subse- 
quently become  of  that  billion  of  additional  bank  money? 


Prosperity  in  the   United  States.  163 

Does  it  assume  the  shape  of  idle  cash  funds,  to  be  a  drug 
on  the  money  market?  No!  It  is  needed  by  the  bor- 
rower to  make  payments  and  is  rapidly  absorbed  in  new 
constructions.  If  so,  it  will  increase  the  demand  for 
working  forces  above  the  normal  (see  page  161) ;  there- 
with the  income  of  these  working  forces;  therewith  the 
demand  for  commodities  on  the  part  of  the  latter.  This 
will  over-stimulate  the  general  demand.  Then  the  means 
of  production  (factories,  railroads,  etc.)  will  be  found 
insufficient  to  meet  the  unusual  demand.  In  consequence 
more  factories,  more  railroad  facilities,  and  more  means 
of  production  will  be  needed,  which,  in  turn,  means  an 
increased  demand  for  cash  funds  and  for  bank  money — 
i.  e.,  a  demand  for  still  more  inflation.  Thus  the  one  in- 
flation will  engender  another  (at  least  in  a  rapidly 'de- 
veloping country)  and,  if  so,  will  tend  more  to  strain 
than  to  relieve  the  money  market — until  the  inevitable 
collapse  makes  an  end  to  further  inflation,  for  the  time 
being. 

I  repeat,  it  may  seem  paradoxical  that  an  artificial 
increase  of  the  money  volume  should  result  in  a  scarcity 
of  cash  funds — but  the  same  result  has  been  observed  at 
other  periods  of  inflation.  The  creation  x)f  artificial 
money  will  (except  in  rare  cases)  stimulate  the  demand 
for  commodities  above  the  normal.  This  demand  may 
seem  quite  healthy;  and  the  increased  production  result- 
ing therefrom  may  likewise  seem  quite  healthy,  inas- 
much as  it  "merely  follows  the  actual  demand."  Never- 
theless it  is  the  inflation  which  actuates  this  abnormal 
demand,  and  the  latter  will  cease  when  inflation  ceases 

THE  PANIC   OF  1907. 

As  the  primary  cause  of  the  collapse  of  1907  we  have 
to  set  down  the  overgrowth  of  the  'volume  of  bank 
money5;  as  secondary  causes  the  various  factors  result- 


164  Recent   Vps  and  Downs  of 

ing  from  this  overgrowth.  The  steady  depreciation  of 
the  money  had  to  work  mischief  sooner  or  later;  the 
abnormal  demand  for  cash  capital,  coupled  with  the 
constant  tightness  of  the  money  market,  created  of  itself 
a  position  impossible  to  maintain  in  the  long  run ;  and  the 
growing  volume  of  the  bank  money  (see  page  154),  was 
bound  finally  to  make  itself  felt  in  some  way  or  other. 

It  was  especially  the  latter  factor—the  excessive  vol- 
ume of  bank  money  coupled  with  an  inadequate  volume 
of  currency — and  the  growing  disproportion  between  the 
two  kinds  of  money,  which  precipitated  the  collapse. 

As  explained  on  page  151,  of  the  total  currency  of 
2,700  millions  extant  outside  the  Treasury  in  1907,  over 
one  billion  was  tied  up  by  the  banks  for  reserve  purposes ; 
allowing  for  this,  the  two  kinds  of  money  compared  as 
follows,  in  August,  1907: 

Currency    in    hand-to-hand    circulation $1,700,000,000 

Business    men's    "money    in    bank" 9,600,000,000 

The  fact  that  all  of  this  bank  money  of  over  nine 
billions  was  redeemable  in  currency  on  demand  em- 
phasized the  gravity  of  this  disproportion.  When  a  some- 
what exceptional  demand  for  redemption  sprung  up,  in 
the  shape  of  a  run  on  a  few  New  York  banks,  the  pro- 
portionate scarcity  of  the  currency  disclosed  itself  in  a 
sensational  manner — the  free  funds  of  all  of  the  New 
York  banks  combined,  were  readily  absorbed  and  were 
found  inadequate  to  meet  this  demand,  so  the  banks  were 
forced  to  stop  redemption  of  the  bank  money5,  and  had 
to  suspend  cash  payments.  Thereupon  the  distrust  of 
bank  money  became  universal,  spreading  over  the  whole 
country  and  giving  rise  to  a  premium  as  high  as  4  and 
5  per  cent,  on  cash  money  as  against  bank  money.  Pres- 
ently the  whole  complicated  system  of  domestic  exchange 
and  of  credit  became  clogged. 


Prosperity  in  the   United  States.  165 

The  further  development  of  the  panic  and  its  gradual 
subsidence  into  a  depression  followed  the  usual  course3 
well  known  to  economists,  so  we  need  not  go  into  the  de- 
tails. 

THE  SUBSEQUENT  DEPRESSION. 

During  the  early  stages  of  the  panic  the  opinion 
seemed  general  that  the  depression  to  ensue  would  be 
intense  but  short-lived.  At  present  (July,  1908)  nine 
months  have  passed  with  little  or  no  improvement.  What 
prevents  the  recovery? 

In  the  course  of  this  treatise  I  have  repeatedly  pointed 
out  that  the  degree  of  prosperity  bears  a  close  relation 
to  the  extent  of  new  constructions  under  way.  While 
the  progress  of  new  constructions  went  on  with  great 
activity  prior  to  the  panic,  it  experienced  a  decided  check 
when  the  disturbance  set  in — a  fact  painfully  evidenced 
by  the  stagnation  in  the  iron  industry,  the  one  pre- 
eminently concerned  in  new  constructions.  Owing  to 
this  check  many  of  the  Constructive  Working  Forces7 
were  thrown  out  of  employment,  and  this,  in  turn,  re- 
acted upon  the  working  forces  employed  in  the  lines  of 
production  and  trade  (Multiplying  Principle),  causing 
considerable  curtailment  of  income,  of  purchasing  power 
and  of  general  demand.  In  consequence  of  the  falling 
off  of  this  demand  the  incentive  for  undertaking  new 
constructions  disappeared,  the  productive  capital  already 
in  existence  (factories,  railroads,  etc.)  proving  more 
than  sufficient  to  meet  the  reduced  demand.  As  a  result, 
that  peculiar  complication  set  in,  common  to  all  depres- 
sions: The  entrepreneurs  do  not  build  because  the  people 
are  backward  in  buying  commodities;  and  the  people 
cannot  buy  because  the  entrepreneurs  do  not  build. 

Instead  of  the  dearth  of  cash  capital  so  noticeable 
before  the  panic,  we  now  see  a  plentiful  supply  of  funds 
in  the  money  market,  with  apparently  no  use  for  them. 


166  Recent  Ups  and  Downs  of 

Only  in  one  line  of  enterprise  are  cash  funds  still  in  de- 
mand; namely,  in  the  railroad  industry;  not  so  much 
for  immediate  requirements,  which  seem  to  be  fully  met 
by  existing  facilities,  as  to  provide  for  the  needs  of  the 
future.  According  to  the  opinion  of  a  leading  railroad 
man  these  will  call  for  a  billion  dollars  annually  for  a 
number  of  years  to  come,  the  capital  invested  in  rail- 
roads having  increased  but  little  in  the  last  five  or  ten 
years,  although  the  traffic  has  grown  enormously.  If  the 
money  market's  idle  funds  were  applied  in  this  direc- 
tion, the  revival  of  business  would  be  much  assisted. 
But  a.  peculiar  difficulty  stands  in  the  way,  inasmuch  as 
the  railroads  find  it  impossible  to  borrow  at  reasonable 
rates  of  interest,  while,  on  the  other  hand,  they  are  un- 
willing to  issue  long-term  bonds  at  an  excessive  rate, 
such  as  they  had  to  pay  on  the  numerous  temporary 
loans  which  they  issued  within  the  last  two  or  three 
years.  Thus,  the  money  market  presents  the  paradox 
of  a  superfluity  of  idle  cash  funds  looking  for  employ- 
ment without  finding  it,  and,  on  the  other  hand,  a  great 
industry  sorely  in  need  of  funds  without  being  able  to 
obtain  them.  Naturally,  this  state  of  affairs  will  not  last 
much  longer,  and  will  come  to  an  end  as  soon  as  investors 
realize  that  the  world-wide  strain  for  cash  capital  is  re- 
laxing, and  that  the  outlook  promises  continued  ease  in 
the  money  markets  for  years  to  come. 

While  a  revival  of  railway  construction  'and  improve- 
ment will  do  its  share  towards  reviving  business  activ- 
ity, we  have  to  reckon  with  several  other  factors  that  will 
operate  in  the  contrary  direction.  Let  us  enumerate 
some  oE  them. 

FIRST. — Wages  and  prices  are  expected  to  go  lower, 
and  while  this  expectation  prevails,  buyers  are  apt  to 
hold  aloof. 


•  Prosperity  in  the   United  States.  167 

SECOND. — The  annual  expansion  of  the  volume  of 
bank  money  which  was  checked  in  consequence  of  the 
recent  panic,  is  not  likely  to  be  resumed  so  long  as  the 
present  abundant  supply  of  idle  cash  funds  continues. 
I  have  pointed  out  on  page  161,  how  this  expansion  of  the 
bank  money  has  created  an  abnormal  demand  for  labor 
and  for  working  forces,  just  for  the  purpose  of  new  con- 
structions. This  abnormal  demand  naturally  ceases  with 
the  stoppage  of  the  further  inflation  of  bank  money.  If 
the  demand,  so  far  as  it  went  beyond  the  normal,  for- 
merly absorbed  say  3  per  cent,  of  all  working  forces,  this 
share  of  the  working  forces  is  now  condemned  to  idle- 
ness. And  owing  to  the  stepping  in  of  the  Multiplying 
Principle  this  share  of  3  per  cent,  may  easily  be  increased 
to  10  per  cent,  or  more. 

THIRD. — The  country's  saving  power  has  grown  to 
a  tremendous  total  per  annum,  especially  on  account  of 
the  vast  fortunes  that  have  been  accumulating  in  indi- 
vidual hands.  So  long  as  savings  and  surplus  earnings 
could  find  ready  absorption  in  new  constructions,  i.  e., 
in  the  Capitalistic  Form  of  investment,  well  and  good ; 
but  where  this  avenue  of  investment  is  largely  closed, 
and  where,  in  consequence,  the  savings  must  find  an 
outlet  in  the  harmful  ''Impairing  Form"  of  investment8, 
there,  the  greater  the  saving  power,  the  greater  will  be 
the  harm  done,  and  the  longer  will  it  take  to  re-establish 
the  equilibrium  between  the  annuial  savings  and  the 
demand  for  them,  i.  e.,  the  demand  in  the  line  of  Capital- 
istic investment. 

As  against  these  three  points  which  work  in  the  wrong 
direction,  we  may  hope  that  the  many  natural  resources 
of  the  country,  still  unexploited,  will,  sooner  or  later, 
attract  capital  and  enterprise,  so  that  savings  and  sur- 
plus earnings  can  again  find  employment  in  their  iegiti- 


168  Recent  Ups  and  Downs  of 

mate  sphere.  This  would  assure  the  return  of  pros- 
perity; though  hardly  in  the  shape  of  that  over-strained 
business  activity  which  prevailed  in  the  decade  from 
1897  to  1907. 

WHAT  OF  THE  FUTURE? 

When  business  does  revive,  the  question  may  arise, 
shall  we  not  again  experience  the  same  troubles  which 
led  to  the  collapse  of  1907?  Have  we  any  assurance 
against  their  recurrence? 

Much  was  said  in  the  years  1906  and  1907  about  the 
danger  threatening  from  the  constant  rise  of  wages  and 
prices,  which,  if  unchecked,  would  ultimately  have  to 
result  in  a  collapse;  and  the  argument  was  often  heard 
that  a  set-back  in  business  activity  would  really  be  de- 
sirable in  that  it  would  counteract  the  doings  of  labor 
unions  and  trusts,  on  whom  was  placed  the  chief  re- 
sponsibility in  bringing  about  this  rise.  The  setback  has 
now  taken  place,  and  has  indeed  imposed  a  check  upon 
that  dangerous  tendency.  After  a  revival  of  business, 
however,  labor  unions  and  trusts  will  no  doubt  resume 
their  activities,  and  their  success  will  depend  largely 
upon  the  extent  to  which  business  revives. 

While  their  aggressions  undoubtedly  aroused  much 
attention,  and  provoked  a  great  deal  of  hostile  agitation, 
designed  to  meet  those  aggressions,  very  little  notice  was 
taken  of  another  equally  important  factor — the  inflation 
of  our  money  volume,  which  resulted  from  the  enormous 
expansion  of  bank  money5.  As  pointed  out  on  page  161, 
this  inflation  not  only  made  possible  the  constant  rise  of 
wages  and  prices,  but  harbored  a  distinct  tendency  of 
its  own  in  the  same  direction,  thus  proving  fully  as 
harmful  in  its  effects  as  the  first-mentioned  factor.  To 
successfully  combat  the  unhealthy  depreciation  of  our 
country's  money,  evidenced  by  the  rise  of  wages  and 
prices,  the  agitation  should  have  been  directed  not  only 


Prosperity  in  the   United  States.  169 

against  the  labor  unions  and  trusts  but  fully  as  much 
against  the  fearful  inflation  of  the  bank  money.  Few 
people,  however,  even  recognized  the  existence  of  this 
factor.  In  fact,  instead  of  devising  means  to  restrain  the 
inflation,  most  of  the  financial  authorities  unwittingly 
advocate  additional  facilites  for  expanding  bank  credits 
still  more,  inasmuch  as  they  demand  greater  freedom  in 
the  issue  of  bank  notes — a  remedy  which  may  be  likened 
to  giving  liquor  to  an  intoxicated  man. 

To  guard  against  the  excessive  expansion  of  bank 
money  and  bank  credits  two  expedients  seem  appro- 
priate: first,  all  commercial  banks  (including  the  Trust 
Banks,  so  far  as  they  create  artificial  money)  should  be 
held  to  keep  a  large  gold  reserve,  say  25  per  cent,  of  the 
amount  of  bank  money5;  second,  nothing  should  be  done 
to  artificially  augment  the  amount  of  cash  in  actual  cir- 
culation— so  as  not  to  make  it  too  easy  for  the  banks  to 
increase  their  reserves,  and  therewith  increase  their  loans 
and  the  volume  of  bank  money.  If  they  simply  could 
print  bank  notes  on  the  strength  of  their  ".assets,"  put- 
ting these  notes  in  circulation,  and  for  every  million  so 
issued  withdraw  a  million  of  gold  from  circulation,  to 
be  used  for  reserve  purposes,  the  inflation  might  go  on 
worse  than  before. 

The  proper  method  of  dealing  with  an  exceptional 
demand  for  cash  funds  and  bank  loans  is  the  one  every- 
where adopted  in  Europe:  An  advance  of  the  rate  of 
interest.  This  would  check,  temporarily  at  least,  many 
security  issues,  such  as  could  not  afford  to  pay  the  ad- 
vanced rate,  and  thus  reduce  the  demand  on  the  money 
market.  Most  of  the  financial  authorities  in  the  United 
States,  however,  argue  the  other  way,  and  hold  it  essen- 
tial to  maintain  a  uniformly  low  rate  of  interest,  even 
when  the  demand  for  cash  funds  should  become  brisk. 
To  attain  this  end  they  propose  the  creation  of  an  elastic 


170  Recent   Ups  and  Downs  of 

currency  in  the  shape  of  bank  notes,  issuable  at  a  low 
rate  of  taxation,  the  volume  to  expand  -or  shrink  accord- 
ing to  the  demands  of  the  money  market.  They  overlook 
the  law  of  supply  and  demand.  According  to  this  law 
the  natural  sequence  to  an  extraordinary  demand  should 
be :  a  rise  of  the  interest  rate. 

i  Where  this  does  not  take  place,  and  where  an  excep- 
tional demand  for  cash  funds  is  simply  met  by  the  manu- 
facture of  cheap  money,  namely,  by  the  printing  of  low- 
taxed  bank  notes,  another  inflation  of  bank  money  is 
likely  to  follow  as  soon  as  business  revives.  Inflation, 
if  once  begun,  harbors  a  certain  tendency  towards  sus- 
taining itself — the  more  there  is  of  it,  the  more  is  wanted, 
see  page  163. 

True,  the  bank-note  currency  oughti  to  be  elastic 
enough  to  prevent  the  interest  rate  from  going  so  high 
that  there  would  be  danger  of  a  collapse  of  the  money 
market.  As  it  were,  the  increase  of  its  volume  should  go 
hand  in  hand  with  the  increase  of  the  interest  rate.  For 
this  purpose  an  "emergency  currency"  would  answer, 
subjected  to  a  high  tax,  say  6  per  cent.  Such  a  tax  would 
allow  the  banks  to  issue  emergency  currency  only  when 
the  market  rate  of  interest  rules  considerably  higher 
than  6  per  cent.,  and  the  tax  would  drive  the  notes  home, 
to  be  canceled,  as  soon  as  the  interest  rate  would  subside, 
i.  e.,  as  soon  as  the  danger  were  over.  (Also  see  page 

187.) 

•>*•***•• 

By  following  the  latter  suggestion  we  would  have  the 
means  at  hand,  not  only  for  guarding  against  a  renewed 
collapse  of  the  money  market,  but  also  for  guarding 
against  a  resumption  of  the  inflation  of  bank  money, 
and  therewith,  indeed,  we  would  have  the  factor  under 
control  which  proved  most  instrumental  in  bringing  about 
the  collapse  of  1907,  and  which,  if  not  restrained,  may 


Prosperity  in  the   United  States.  171 

prove  equally  dangerous  in  the  future,  after  the  revival 
of  business.  Of  the  three  disturbing  elements  considered 
in  the  foregoing  pages — labor  unions,  trusts,  and  infla- 
tion— the  latter  seems  about  the  only  one  which  is  amen- 
able to  our  control,  all  efforts  to  check  the  other  two 
having  so  far  proved  futile.  But  by  checking  the  one 
we  will,  in  an  indirect  way,  attain  the  means  for  exercis- 
ing at  least  a  partial  check  on  the  other  two.  It  would 
hamper  labor  unions  and  trusts  in  two  directions.  In 
the  first  place,  the  general  demand  would  become  smaller 
because  the  factor  now  unduly  swelling  it,  as  pointed 
out  on  page  161,  would  disappear;  in  the  second  place,  if 
labor  unions  and  trusts  should  try,  in  spite  of  the  smaller 
demand,  to  materially  raise  wages  and  prices,  they  would 
cause  a  comparative  scarcity  of  money,  and  this  of  itself 
would  tend  to  counteract  such  a  rise. 

Continuous  inflation  of  the  bank  money  will  natural- 
ly lead  to  a  collapse.  Most  of  our  financial  authorities 
are  unable  to  see  that  the  collapse  of  1907  was  due  to 
that  cause.  But  another  collapse  may  follow  if  after 
revival  of  business  the  inflation  should  be  resumed  in 
that  reckless  manner  as  before. 

IN  CONCLUSION. 

In  Chapters  1  to  6  I  have  established  the  theory  that 
depressions  are  due  to  Impair  Savings.  In  the  present 
Chapter  I  have  shown  that  the  disturbances  of  1893  and 
1907  were  brought  about  by  causes  of  quite  a  different 
nature;  the  one  of  1893  being  distinctly  traceable  to  the 
unhealthy  condition  of  our  foreign  trade ;  the  one  of  1907 
having  its  origin  in  monetary  conditions.  The  present 
chapter,  therefore,  may  seem  to  contradict  the  previous 
ones.  But  the  apparent  conflict  will  disappear  when  con- 
sidering the  point  elucidated  in  Chapter  1:  that,  though 
Impair  Savings  always  form  the  ruling  and  sustaining 


172  Recent   Upa  and  Donns  of 

element  of  a  depression  alter  it  once  has  set  in,  they 
mar  not  constitute  the  factor  which  primarily  caused  the 
economic  disturbance  and  ushered  in  the  depression.  An 
economic  disturbance  may  be  brought  about  whenever 
any  one  of  the  various  factors  essential  for  prosperity 
(see  Chapter  7)  is  lacking;  and  a  depression  always  ac- 
companies the  disturbance;  but  it  takes  Impair  Savings 
to  give  continuity  to  the  depression  after  the  cause  of  the 
disturbance  has  ceased  to  operate. 

Such  is  the  case  with  our  present  situation  (1908). 
The  collapse  which  took  place  in  the  fall  of  1907  can 
clearly  be  traced  to  the  inflation  of  bank  money  and  the 
concurrent  strain  on  the  money  market.  At  present, 
however,  these  two  adverse  factors  are  no  longer  opera- 
tive. So  the  causes  which  ushered  in  the  depression  have 
disappeared.  As  nevertheless  the  depression  continues, 
a  new  factor  must  have  stepped  in  to  which  that  con- 
tinuance is  due.  This  new  factor  arose  from  a  change 
in  the  character  of  the  saving  process.  It  consists  of 
Impair  Savings.  Could  this  factor  be  removed,  the  de- 
pression would  speedily  come  to  an  end. 

In  1893  the  situation  was  somewhat  different,  inas- 
much as  the  unhealthy  condition  of  our  foreign  trade, 
the  cause  which  then  inaugurated  the  panic,  did  not  pass 
away  after  the  latter  had  subsided.  Owing  to  the  un- 
favorable trade  balance  our  gold  supply  had  heavily  been 
drawn  upon  previous  to  1893  (see  page  141),  thus  weak- 
ening our  monetary  position  and  making  it  easy  for  that 
clique  of  reckless  financiers  to  engineer  the  raid  on  the 
stock  market  which  presently  developed  into  a  panic. 
This  unhealthy  condition  of  the  foreign  trade  extended 
over  the  whole  period  of  the  depression,  and  the  latter 
was  not  relieved  until,  in  1897,  our  foreign  trade  took  a 
decided  turn  for  the  better.  So  it  may  seem  that  the  de- 
pression was  entirely  a  matter  of  foreign  trade,  and  in 


Prosperity  in  the   United  States.  173 

no  way  due  to  Impair  Savings.  As  a  matter  of  fact,  how- 
ever, the  latter  fully  played  their  part.  They  set  in  as 
soon  as  the  disturbance  set  in.  Without  them  the  panic 
never  could  have  attained  the  dimensions  which  it 
reached;  and  without  them  the  subsequent  prolonged 
depression  would  not  have  existed — there  would  have 
been  more  buying  of  commodities,  and  less  unemploy- 
ment, and  more  of  an  equilibrium  between  demand  and 
supply. 

From  whatever  standpoint  we  approach  the  subject 
of  depressions,  we  will  find  that  as  soon  as  we  probe  the 
matter  to  the  bottom  we  inevitably  encounter  Impair 
Savings  as  their  underlying  cause.  Other  factors,  such 
as  described  in  this  chapter,  may  engender  more  or  less 
economic  disturbance;  but  only  when  Impair  Savings 
join  (as  they  mostly  do)  will  the  disturbance  assume 
that  chronic,  paralyzing  form  which  we  call  depression. 

On  page  132  I  have  spoken  of  an  antidote  for  Impair 
Savings,  namely,  enterprise.  This  is  such  a  prominent 
factor  in  the  United  States,  and  the  country  offers  so 
many  opportunities  allowing  it  to  become  effective,  that 
the  antidote  ought  to  seem  powerful  enough  to  make 
the  very  formation  of  Impair  Savings  impossible.  Yet 
at  present,  1908,  we  have  the  fact  before  us  that  enter- 
prise is  largely  paralyzed,  and  but  little  is  being  done  to 
exploit  our  natural  resources,  so  the  antidote  against 
Impair  Savings  has  become  ineffective.  The  latter  have 
gained  the  upper  hand.  They  destroy  the  equilibrium 
between  demand  and  supply,  and  thus  engender  de- 
pression, at  a  time  when  all  the  elements  of  prosperity 
seem  to  be  at  hand. 


Have  we  any  positive  proof  that  Impair  Savings  are 
really  going  on  during  the  present  depression?  I  think 
we  have — despite  the  fact  that  a  large  share  of  our  sav- 


174      Recent  Ups  and  Downs  of  Prosperity  in  the  U.  S. 

ing  power  is  constantly  being  absorbed  by  the  issue  of 
new  securities,  especially  in  the  railroad  line,  to  an  extent 
(mite  unusual  for  times  of  depression.  The  savings  so 
absorbed  are  turned  to  good  advantage,  and  on  this 
account  the  depression  of  1908  is  far  less  severe  than  the 
one  of  1S93.  But  not  nearly  all  of  the  savings  now 
made  are  thus  absorbed  for  useful  purposes;  and  the 
balance  will  create  harm.  Wherever  we  see  people  " run- 
ning behind"  and  gettine  poorer,  owing  to  general  mar- 
ket conditions  and  to  the  lack  of  employment,  there  we 
see  the  effect  of  Impair  Savings,  thus  giving  us  positive 
proof  that  Impair  Savings  exist — see  page  120. 


CHAPTER    IX. 

SUMMARY  OF  THE  FOREGOING. 

THE  dual  nature  of  the  saving  process,  the  radical 
change  in  its  character  under  varying  circum- 
stances— stimulating  business  at  one  time,  and  depress- 
ing it  at  another — has  so  far  not  received  due  recogni- 
tion on  the  part  of  economists.  Practically  only  its 
bright  side  has  been  studied.  The  dark  side,  though 
often  pointed  out  by  authors  of  the  present  and  of  the 
past,  has  been  largely  argued  away.  So  strong,  indeed, 
is  the  sentiment  of  economists  on  this  point,  that  where 
they  find  anyone  who  doubts  the  ultimate  usefulness  of 
the  saving  process,  they  will  generally  attribute  such 
doubts  to  ignorance  of  one  of  the  accepted  axioms  of 
economics.  The  sooner  we  discard  the  idea  that  so  much 
saving  means  so  much  increase  of  the  community's 
wealth,  and  the  sooner  we  recognize  that  only  a  portion 
of  the  savings  now  made  will  benefit  the  commonwealth, 
the  sooner  will  we  be  in  a  position  to  arrive  at  practical 
measures  for  doing  away  with  depressions  of  trade. 

A  BRIEF  REVIEW. 

Let  us  recapitulate  the  leading  points  of  the  Depres- 
sion theory  developed  in  this  book. 

"Lack  of  demand"  is  the  fundamental  feature  of 
all  depressions.  If  we  can  learn  the  cause  of  the  one,  we 
know  the  cause  of  the  other. 

In  the  course  of  ordinary  business  the  producer  and 
seller  of  a  dollar's  worth  of  commodities  will  subsequent- 
ly buy  a  dollar's  worth  of  other  commodities,  either  he  or 
his  family;  so  the  suppty  should  equal  the  demand,  and 
there  should  be  no  "lack  of  demand.'* 


176  Summary  of  the  Foregoing. 

A  complication  arises  by  the  interference  of  the  sav- 
ing1 process.  The  saver,  though  selling  his  own  services 
or  goods,  does  not  care  to  buy  those  of  others.  And  if 
he  omits  to  do  so.  there  must  be  a  shortage  of  the  de- 
mand. All  economists  agree  in  the  opinion  that  the  initial 
stage  of  the  saving  process  tends  to  curtail  the  demand. 

So  long  as  the  saver  (or  somebody  else  for  him) 
promptly  invests  his  savings  or  surplus  earnings  in  the 
"Capitalistic"  manner,  i.  e.,  in  new  constructions  or  in 
the  creation  of  new  wealth,  that  shortage  of  demand  is 
fully  compensated  for.  He  will  call  for  working  forces6 
to  engage  in  such  new  constructions,  and  his  savings  will 
be  turned  into  income  for  these  working  forces.  Then 
the  inherent  tendency  of  the  saving  process,  to  create  a 
lack  of  demand,  is  fully  counteracted.  But  if  not  so 
counteracted,  that  inherent  tendency  will  become  effec- 
tive despite  the  fact  that  the  savings  become  invested, 
and  a  shortage  of  the  demand  will  follow — a  shortage  en- 
tirely due  to  the  saving  process.  The  latter  then  changes 
from  the  "Capitalistic"  to  the  "Impairing"  form.  It 
serves  no  longer  towards  increasing  the  aggregate  wealth 
of  the  country,  but  leads  to  a  mere  shifting  of  wealth, 
making  the  savers  richer,  others  poorer. 

This  process  has  been  demonstrated  on  page  40  by 
means  of  my  "Basic  Calculation."  If  the  savers  save  up 
two  billions  in  the  course  of  a  year,  and  become  richer 
by  that  much,  while  the  country's  wealth  or  property 
increases  only  one  billion,  then  they  must  have  extracted 
the  other  billion  from  the  non-savers,  the  latter  becom- 
ing poorer  to  that  extent.  If  the  non-savers  owned  fifty 
billions  at  the  beginning  of  the  year,  they  will  own  only 
forty-nine  billions  at  the  end  of  it.  So  it  was  partly  at 
their  expense  that  the  savers  became  richer.  Without 
the  saving  process,  this  impoverishment  of  the  non-sav- 
ers would  not  have  taken  place. 


Summary  of  the  Foregoing.  177 

How  is  this  impoverishment  effected?  By  lack  of 
employment. 

Suppose  that  in  a  year  of  prosperity,  the  aggregate 
savings  amount  to  three  billions,  all  of  this  being  invest- 
ed in  new  constructions,  and  becoming  income  for  the 
Constructive  Working  Forces.7  If  that  three  billions  of 
new  constructions  dwindles  down,  in  a  year  of  depres- 
sion, to  one  billion,  there  will  be  two  billion  dollars ' 
worth  of  "Constructive"  Forces  thrown  out  of  employ- 
ment. 

Now  let  us  further  suppose  that  the  individuals  repre- 
senting the  unemployed  part  of  the  Constructive  Forces 
had  property  which  they  could  sell  or  borrow  on,  and 
that,  by  doing  so,  they  were  procuring  the  means  for  con- 
tinuing their  style  of  living  and  their  expenditures  pre- 
cisely in  the  manner  they  were  used  to  when  fully  em- 
ployed; what  character  would  the  depression  assume 
under  such  conditions? 

The  depression  would  then  be  confined  strictly  to 
the  Constructive  Forces,  to  the  trades  usually  engaged  in 
new  constructions,  and  would  in  no  way  extend  to  the 
"Commodity"  Forces7.  The  latter,  representing  prob- 
ably 85  per  cent,  of  the  whole,  would  find  just  as  much 
employment  and  just  as  much  demand  for  their  products 
as  before,  our  assumption  being  that  the  Constructive 
Forces  expend  fully  as  much  for  commodities  as  form- 
erly. Under  such  circumstances  there  would  be  no  diffi- 
culty to  recognize  the  true  character  of  the  change  in 
the  saving  process.  Instead  of  leading  to  an  augmenta- 
tion of  the  country's  wealth  in  the  shape  of  new  con- 
structions, it  would  merely  lead  to  a  "Change  of  Posses- 
sion" of  such  property  as  already  exists,  the  Constructive 
Forces  losing  property  (or  becoming  indebted)  to  the 
extent  of  two  billions  a  year,  and  the  savers  becoming 
richer  by  that  much. 


178  Summary  of  the  Foregoing. 

In  the  foregoing  we  assumed  that  the  Constructive 
Forces,  though  not  earning  anything,  would  in  no  way 
restrict  their  purchases  of  commodities.  In  reality,  how- 
ever, they  will  economize,  and  very  much  so,  even  if 
owning  property  on  which  they  could  realize.  They  may 
/educe  their  consumption  to  one-quarter  of  what  it  was. 
In  that  case  they  would  lessen  their  demand  for  commodi- 
ties by  a  billion  and  a  half.  This  lessening  of  the  demand 
would  entail  a  lessening  of  the  production  of  commod- 
ities. This,  again,  would  entail  a  corresponding  unem- 
ployment among  the  Commodity  Forces7,  and  bring  the 
total  loss  of  income,  due  to  unemployment,  to  three  bil- 
lions and  a  half.  Nor  will  the  loss  stop  there.  Owing  to 
the  weli-known  process  of  action  and  reaction,  unemploy- 
ment will  spread  from  one  trade  to  another,  multiply,  as 
it  were  (Multiplying  Principle)  and  bring  up  the  loss 
of  income  to  an  -amount  much  larger  than  the  whole 
amount  of  the  savings.  The  more  the  people  try  to  meet 
the  loss  of  income  by  economy  and  privation,  and  the 
more  they  cut  down  their  expenditures,  the  more  will  the 
demand  for  commodities  be  lessened  and  the  severer 
will  be  the  stagnation  in  trade. 

The  Change  of  Possession  (of  property  already  exist- 
ing) is  inseparable  from  this,  the  Impairing  Form  of  the 
saving  process.  The  Change  of  Possession  is  enforced 
by  means  of  unemployment  and  by  the  loss  of  income  re- 
sultling  therefrom.  Among  the  unemployed  (or  only 
partly  employed)  there  are  many  who  own  property. 
They  need  money  to  pay  their  living  expenses.  So  they 
must  either  borrow  or  realize  on  what  they  own.  Un- 
employment, therefore,  and  loss  of  income,  form  the  whip 
which  forces  people  to  part  with  their  property,  there- 
with giving  the  savers  an  opportunity  to  invest  their 
savings  either  in  buying  the  property  or  in  lending 
money  on  it.  For  every  million  of  Impair  Savings  a  mil- 


Summary  of  the  Foregoing.  179 

lion  of  properties  or  securities  must  go  into  the  possession 
of  the  savers,  otherwise  the  savings  would  accumulate  in 
the  shape  of  hoards,  and  matters  would  become  still 
worse. 

After  the  million  has  been  thus  invested,  and  the 
money  been  expended  by  the  receivers,  for  commodities, 
the  money  returns  into  the  channels  of  production  and 
trade,  and  the  chain  of  mischief  caused  by  the  saving  of 
that  individual  million  comes  to  an  end. 
****••*• 

Ordinarily  each  individual  member  of  the  working 
forces  is  not  only  a  producer,  but  also  a  consumer.  Under 
the  Impairing  Form  of  saving  or  investing,  however, 
demand  and  supply  are  no  longer  united  in  the  same 
individual.  Two  individuals  will  no  longer  furnish  two 
supplies  and  two  demands,  but  only  one  supply  and  one 
demand;  i.e.,  for  working  forces;  the  saver  producing 
without  consuming,,  and  the  consumer  finding  himself 
without  the  opportunity  to  produce,  his  services  being 
left  uncalled  for. 

Our  economists  have  been  arguing  that  inasmuch  as 
all  savings  funds  are  finally  turned  into  goods  or  services, 
thereby  giving  employment  to  working  forces,  the  sav- 
ing process  can  not  give  rise  to  a  shortage  of  the  demand, 
even  at  times  of  depression.  They  overlook  the  fact  that 
before  the  saving  funds  are  expended  for  goods  or  ser- 
vices, unemployment  stands  in  between — unemployment 
caused  directly  by  the  saving  activity,  when  assuming 
its  Impairing  Form. 

I  repeat,  the  saving  activity  always  harbors  the  in- 
herent tendency  of  causing  unemployment  and  curtailing 
the  demand.  This  tendency  is  fully  counteracted  when- 
ever the  savings  are  invested  in  new  constructions  or  in 
the  creation  of  additional  wealth;  but  if  not  so  counter- 
acter,  that  tendency  will  become  operative.  The  great- 


180  Summary  of  the  Foregoing. 

er  the  amount  of  savings,  and  the  smaller  the  proponion 
which  finds  investment  in  new  constructions,  the  greater 
will  be  the  harm  inflicted  upon  the  community.  The  hjjrm 
so  inflicted,  invariably  aggravated  by  the  stepping  in  of 
the  Multiplying  Principle,  will  fully  account  for  all  the 
phenomena  observed  at  a  time  of  depression. 

We  cannot  do  away  with  depressions  before  we  find 
means  to  restrict  or  eliminate  the  Impairing  Form  of  the 
saving  process. 

THE  THREE  DEGREES  OF  BUSINESS  ACTIVITY. 

From  the  foregoing  it  follows  that  prosperity  will  be 
high  or  low,  according  to  the  character  of  the  saving 
activity.  In  Chapter  8,  however,  a  further  factor  has 
been  referred  to,  namely,  the  inflation  of  the  money 
volume,  which  likewise  plays  an  important  part  in  affect- 
ing the  course  of  business.  Accordingly,  we  may  dis- 
tinguish three  degrees  of  business  prosperity,  as  follows: 

1— HEALTHY  BUSINESS.— Best  results  are  at- 
tained when  the  annual  savings1  available  for  investment 
are  neither  larger  nor  smaller  than  the  amount  of  cash 
capital  required  for  new  constructions3 — always  presum- 
ing, of  course,  that  the  other  factors  essential  for  pros- 
perity (as  enumerated  in  Chapter  7)  are  at  hand.  Then 
the  saving  process  will  not  disturb  the  equilibrium  be- 
tween supply  and  demand,  and  there  will  be  no  lack  of 
the  latter.  The  aggregate  of  savings  should  not  be  too 
large,  hardly  over  10  or  12  per  cent,  of  the  people's  ag- 
gregate income,  in  a  new,  progressive  country;  5  per 
cent,  in  an  old  well  developed  country.  In  the  latter  case 
95  per  cent,  of  all  working  forces  would  be  absorbed 
for  purposes  of  production  and  distribution  of  commod- 
ities, and  only  5  per  cent,  for  new  constructions.  Then, 
if  a  lull  in  new  constructions  should  take  place,  and  part 


Summary  of  the  Foregoing.  181 

of  the  Constructive  Forces7  should  be  thrown  out  of  em- 
ployment, this  would  represent  only  a  fraction  of  5  per 
cent,  of  the  aggregate  of  all  working  forces,  so  the  reac- 
tion on  the  remaining  95  per  cent,  and  on  business  in 
general  would  be  but  slight. 

Such  a  healthy  state  of  business  is  favored  by  a 
reasonably  even  distribution  of  wealth,  such  as  obtains 
in  France.  The  concentration  of  wealth  in  a  few  hands 
is  not  desirable,  especially  in  old  countries.  It  will  un- 
duly promote  the  saving  process  (see  page  66).  And 
though  this  may  do  no  harm  in  a  new  country,  like  the 
United  States,  so  long  as  wealth  and  population  are  rapid- 
ly expanding  and  all  savings  readily  absorbed  in  new 
constructions,  it  will  do  harm  when  a  lull  in  new  con- 
structions sets  in.  Then  savings  become  Impair  Savings; 
and  the  greater  their  volume,  the  more  will  the  recovery 
of  business  be  impeded. 

2.—  OVER-STRAINED  BUSINESS.  —  This  takes 
place  whenever  the  supply  of  cash  capital  does  not  come 
from  the  saving  process  alone,  but  is  largely  supple- 
mented by  the  creation  of  artificial  money,  by  an  infla- 
tion either  of  bank  money5  or  of  printed  currency; 
especially  so  of  the  latter.  In  the  United  States  it  was 
principally  the  undue  expansion  of  bank  money  (see  page 
161)  which,  in  conjunction  with  the  unusual  extent  of 
new  constructions,  imparted  that  over-strained  character 
to  business  which  marked  the  years  preceding  1908. 
These  new  constructions  caused  more  demand  for  work- 
ing forces  than  could  be  had.  Besides,  they  distorted 
the  proportion  between  "Constructive"  and  "Commo- 
dity"7 Working  Forces,  the  former  reaching  a  figure 
probably  as  high  as  15  per  cent,  of  the  total,  or  more. 
When,  in  1908,  a  depression  followed  the  panic  of  1907, 
there  was  still  a  fair  demand  for  new  constructions,  but 
by  far  insufficient  to  absorb  all  of  the  Constructive  Work- 


182  Summary  of  the  Foregoing. 

ing  Forces  then  in  existence.  And  the  surplus  could  not 
find  employment  among  the  Commodity  Forces.  These, 
constituting  85  per  cent,  of  the  aggregate,  were  fully 
capable  of  supplying  the  consumptibles  needed  for  all, 
even  at  the  time  of  the  great  demand  during  the  boom, 
and  are  certainly  so  at  present  (1908),  with  the  demand 
largely  reduced. 

Over-strained  business,  though  imparting  the  impres- 
sion of  excessive  prosperity  so  long  as  it  lasts,  is  bound 
to  come  to  an  end  sooner  or  later.  It  rests  upon  infla- 
tion, and  this  can  not  go  on  forever.  When  the  process 
of  inflation  ceases,  we  find  many  unhealthy  conditions 
to  have  developed:  a  superabundance  of  Constructive 
Forces,  with  no  work  for  the  greater  part  of  them ;  wages 
unduly  advanced,  and  therewith  the  general  level  of 
prices;  foreign  trade  in  a  precarious  condition,  the  home 
market  having  become  a  better  one  for  foreigners  to  sell 
in  and  a  poorer  one  to  buy  in ;  credits  strained  beyond 
the  limit  of  safety;  a  growth  of  the  desire  for  big  profits 
at  the  expense  of  conservative  business  methods. 

3.— DULL  BUSINESS.— The  cause  of  this  has  been 
so  fully  considered  in  the  course  of  this  treatise  that  it 
seems  only  necessary  to  say:  If  it  is  not  due  to  the  ab- 
sence of  any  one  of  the  known  essentials  to  prosperity, 
enumerated  in  Chapter  7,  it  is  due  to  Impair  Savings. 


The  conditions  set  forth  under  Point  1  are  conducive 
not  only  to  a  healthy  state  of  business,  but  they  also 
favor  stability.  Those  set  forth  under  Point  2  tend 
toward  extremes — too  much  business  at  one  time,  too 
little  at  another. 

At  ''normal"  times  business  ought  to  be  of  the  char- 
acter stated  under  Point  1 ;  but  we  generally  find  much 
of  a  co-admixture  of  the  conditions  embraced  in  Points 


Summary  of  the  Foregoing.  183 

2  and  3—  on  the  one  hand  there  is  more  or  less  of  Impair 
Savings,  as  evidenced  by  the  fact  that  the  demand  con- 
stantly falls  short  of  the  supply;  on  the  other,  we  find  a 
gradual  but  steady  inflation  going  on,  as  evidenced  by 
the  constant  swelling  of  the  volume  of  circulating  money, 
and  much  more  so  of  bank  money.5  The  latter  especially 
has,  in  the  last  decade,  expanded  to  an  extent  which 
seems  to  bring  us  near  the  limit.  It  has  stimulated  busi- 
ness whil  e  it  went  on ;  but  in  future  we  may  have  to  do 
without  this  unhealthy  stimulant,  and  if  so,  we  may  not 
again  experience  such  a  period  of  excessive  boom  as  we 
did  of  late. 

Let  it  be  well  understood,  the  phenomenal  business 
activity  witnessed  in  the  United  States,  between  1897 
and  1907,  was  largely  caused  by  the  phenomenal  inflation 
of  the  bank  money.  While  all  economists  admit  the  stim- 
ulating effect  of  an  inflation  of  the  currency,  and  while 
but  few  of  them  will  attribute  a  similar  (though  weaker) 
influence  to  the  inflation  of  bank  money,  such  influence, 
certainly  existed,  as  explained  on  page  161.  Also  in 
Germany  has  the  inflation  of  the  bank  money  played  its 
part  towards  creating  the  unusual  business  activity  wit- 
nessed there  in  recent  years  and  the  aftermath  will  be 
severe,  considering  that  the  country  has  not  (like  the 
United  States)  many  opportunities  left  for  the  profitable 
investment  of  savings1  and  that  the  latter,  therefore,  will 
largely  assume  the  character  of  Impair  Savings,  far  more 
so  than  with  us.  In  either  case  the  position  as  to  foreign 
trade  and  as  to  the  <; balance  of  payments"  has  become 
rather  weak,  America  exporting  gold,  and  Germany 
struggling  to  retain  her  gold  supply  by  means  of  a  high 
bank  rate."  If  the  inflation-stimulant  should  spread  to 
other  countries,  already  weak  in  foreign  trade,  like  Russia 
or  Austria,  it  probably  will  not  develop  very  much  before 
the  growing  "balance  of  payments"  inaugurates  a  drain 


184  Summary  of  the  foregoing. 

on  the  gold  supply,  therewith  deranging  the  country's 
financial  condition  and  making  an  end  to  the  inflation 
business. 

ECONOMIC  FALLACIES. 

There  is  no  science  which  contains  so  many  contradic- 
tions and  conflicting  views  as  may  be  found  in  economics. 
Hardly  two  experts  will  everywhere  agree  on  funda- 
mental points  and  on  their  bearing.  To  a  large  extent 
this  dissension  of  views  is  due  to  the  fact  that  the  origin 
of  one  pf  the  most  important  phenomena,  namely,  de- 
pression and  slack  business,  has  so  far  remained  unknown 
— in  consequence  of  which  every  economist,  who  did  his 
own  thinking,  formulated  a  theory  of  his  own  to  account 
for  those  phenomena,  and  in  doing  so  had  to  resort  to 
more  or  less  "adjustment"  in  order  to  make  the  facts 
agree  with  his  theory.  The  true  cause  of  depression 
known,  we  will  have  a  guide  for  testing  many  of  the 
conflicting  opinions  as  to  their  correctness,  and  a  num- 
ber of  views  now  current  will  have  to  be  abandoned  or 
modified.  In  the  following  I  enumerate  some  of  these : 

1. — "Extravagance  is  one  of  the  chief  causes  of  our 
present  depression  and  of  depressions  in  general. — 
Had  we  had  less  extravagance,  or,  what  comes  to  the 
same  thing,  more  saving,  at  the  time  of  the  boom,  less  of 
the  people's  income  would  have  been  spent  for  commo- 
dities, and  more  of  it  for  new  constructions.  Then  the 
proportion  between  "Constructive"  and  "Commodity" 
Working  Forces7,  instead  of  being  as  15  to  85,  might  have 
been  as  20  to  80.  In  consequence,  new  constructions 
would  have  proceeded  at  a  still  faster  rate,  and  we  would 
have  arrived  all  the  sooner  at  a  superfluity  of  these,  i.  e., 
at  a  superfluity  of  productive  capital.  Then  new  con- 
structions would  come  to  a  halt,  the  boom  would  cease, 
and  depression  would  set  in.  The  depression  would  not 


Summary  of  the  Foregoing.  185 

only  set  in  so  much  the  sooner,  but  would  be  more  severe, 
with  consumption  restricted  (as  premised)  and  the  num- 
ber of  unemployed  Constructive  Forces  much  larger  than 
at  present. 

In  a  healthy  development  an  increase  of  consumption 
should  go  hand  in  hand  with  the  increase  of  productive 
capital.  To  restrict  the  former  would  mean  a  restriction 
of  the  demand.  The  lack  of  demand,  however,  is  just 
what  causes  the  depression. 

2.— Excessive  extravagance  during  the  boom  was 
evidenced  by  the  excessive  demand  for  consump- 
tibles,  which  was  almost  greater  than  the  produc- 
tive power  of  the  country.  Therefore  that  scarcity 
of  labor.  Without  this  excessive  demand,  that 
mad  rush  for  extending  the  productive  capital 
in  order  to  meet  the  great  demand  would  not 
have  developed.  —  No  doubt  the  scarcity  of  labor  indi- 
cated an  unusual  demand  for  the  products  of  labor,  i.  e., 
for  consumptibles.  But  I  have  shown,  on  page  161,  that 
this  great  demand  for  labor  was  principally  caused  by 
the  inflation  of  bank  money.5  A  billion  of  additional 
bank  money  means  a  billion  of  additional  demand  for 
working  forces.  If  the  country's  working  forces  repre- 
sent a  productive  power  of  20  billions  per  annum,  and  by 
means  of  inflation  the  demand  is  increased  to  21  billions 
— not  only  the  demand,  but  also  the  income  and  the  buy- 
ing power —  then,  indeed,  the  demand  must  seem  unduly 
large  when  compared  with  the  productive  power.  That 
excessive  demand,  however,  as  well  as  the  seeming  ex- 
travagance deduced  therefrom,  must  disappear  as  soon 
as  the  inflation  comes  to  a  halt.  The  panic,  therefore, 
was  not  caused  by  extravagance,  but  by  the  inflation  of 
the  bank  money. 

3. — As  we  did  not  economize  sufficiently  during  the 
boom,  we  must  do  so  now;  the  greater  the  economy,  the 


186  Summary  of  the  Foregoing. 

sooner  shall  we  have  the  funds  necessary  for  another  era 
of  new  constructions. — Do  we  really  need  more  of  new 
constructions  at  present  and  more  economy  to  obtain  the 
funds  for  erecting  them,  or  do  we  need  the  reverse — less 
economy  and  move  buying  of  consumptibles,  so  as  to  pro- 
vide employment  for  the  productive  capital  already  ex- 
isting? I  believe  we  need  the  latter. 

Though  we  often  hear  the  assertion  that  we  did  not 
save  enough  and  did  not  economize  sufficiently  during 
the  boom,  the  fact  remains  that,  despite  the  seeming  ex- 
travagance, the  country's  aggregate  savings  were  enor- 
mous— otherwise  we  would  not  have  had  the  funds  where- 
with to  create  all  those  new  constructions  which  sprung 
up  at  that  time. 

4  —  The  panic  was  due  to  over-production. — Previous 
to  the  panic  the  question  was  quite  often  raised  as  to 
whether  over-production  was  really  going  on,  and  the 
question  has  as  often  been  denied  by  all  unbiased  ob- 
servers. Production  did  not  run  ahead  of  the  demand 
but  merely  followed  it.  For  the  cause  of  the  great  de- 
mand I  refer  to  Point  2. 

5.— Panics  are  due  to  a  lack  of  equilibrium  in  produc- 
tion.-This  easy  to  say,  but  hard  to  prove.  I  have  dis- 
cussed this  topic  on  page  70.  As  a  rule,  production  will 
follow  the  demand,  and  if  so,  how  can  there  be  a  lack  of 
equilibrium  in  production? 

6.— Panics  are  caused  by  too  rapidly  "discounting" 
the  future  through  placing  of  capital  (cash  capital)  in 
fixed  investments. -So  long  as  the  funds  used  for  fixed 
investments,  i.  e.,  for  new  constructions,  like  railroads, 
factories,  etc.,  come  from  the  saving  process,  there  is  no 
harm.  And  no  harm  if  the  funds  are  borrowed,  provided 
the  lender  derives  them,  directly  or  indirectly,  from  the 
saving  process.  But  the  danger  commences  (even  for 


Summary  of  the  Foregoing.  187 

solid  undertakings)  if  the  funds  are  derived  from  the  in- 
flation process — say,  by  extending  the  issue  of  bank 
money.5  Inflation  has  that  peculiar  quality  of  being  self- 
sustaining;  the  more  there  is  of  it,  the  more  is  needed 
(see  page  163).  And  as  inflation  cannot  be  carried  on 
indefinitely,  a  collapse  is  bound  to  ensue. 

7. — The  panic  was  due,  in  part  at  least,  to  the 
inelasticity  of  our  currency  volume,  which  fails 
to  respond  to  the  varying  demands  of  business. 
To  remedy  this,  bank  notes  should  be  freely 
issued  or  retired  according  to  the  require- 
ments of  the  money  market. — If,  before  the  panic, 
our  currency  had  been  given  the  right  kind  of  elasticity, 
the  panic  would  most  likely  have  been  prevented — say, 
by  allowing  the  issue  of  an  emergency  currency,  subject 
to  a  hiffh  tax.  But  suppose  that  the  tax  had  been  low, 
and  the  notes  issuable  ad  libitum,  even  at  the  time  of  the 
boom,  what  would  have  been  the  consequence?  In  face 
of  the  insatiable  demand  for  cash  funds  which  ruled  in 
1906  and  1907,  we  would  have  had  an  inflation  of  the  cur- 
rency (see  page  169),  on  top  of  the  inflation  of  the  bank 
money.  Then  the  collapse  inevitably  following  excessive 
inflation  might  have  led  to  a  similar  distrust  of  bank  notes 
as  did  attach  to  the  bank  money,  thus  multiplying 
disaster. 

Inflation  for  the  sake  of  temporary  needs,  say,  for 
moving  the  crops,  does  no  harm,  if  followed  by  a  corre- 
sponding contraction.  Inflation,  however,  if  resorted  to 
in  order  to  provide  the  funds  for  permanent  investment, 
is  objectionable.  It  over-stimulates  the  general  demand 
while  going  on,  but  creates  a  shortage  of  demand  when 
coming  to  a  halt.  (See  Point  2.) 

8. —  Wliile  at  a  time  of  great  prosperity  sav- 
ings funds  are  absorbed  almost  exclusively  in 
new  constructions,  an  occasional  setback  be- 


188  Summary  of  the  Foregoing. 

comes  necessary  to  provide  for  the  money 
markets  "other  requirements"  —  These  "other 
requirements"  are  a  myth.  In  Chapter  2  I  have  dis- 
cussed all  imaginable  possibilities  as  to  what  they  might 
consist  of,  and  have  shown  that  none  of  them  really 
absorb  the  country's  savings  funds. 

9. — No  harm  can  attach  to  the  saving  process  so  long 
as  the  savings  funds  find  ready  employment.  Even  at 
times  of  depression  they  accumulate  in  the  money  mar- 
ket to  a  limited  extent  only,  showing  that  they  are  ab- 
sorbed. And  as  business  men  when  absorbing  them  will 
apply  them  to  some  useful  purpose ,  the  saving  process 
must  always  lead  to  a  useful  end. — No  argument  has 
occasioned  greater  confusion  in  the  economic  world  than 
this  one,  highly  plausible  as  it  appears.  As  a  matter  of 
fact  the  seemingly  "useful  end''  often  consists  of  noth- 
ing but  Impair  Investments8 — a  form  of  investment  which 
so  far  has  remained  unknown  to  our  economists.  Once 
it  is  known,  Argument  9  becomes  untenable. 

10. — Savings  funds,  if  failing  to  find  useful  employ- 
ment at  home,  would  simply  go  abroad. — Except  to  a 
very  limited  extent  investments  abroad  can  not  be  ef- 
fected unless  the  state  of  the  country's  foreign  trade 
allows  of  it,  the  foreign  investments  being  circumscribed 
by  the  extent  to  which  the  trade  balance  (see  page  135) 
may  be  favorable — a  subject  fully  elaborated  on  page 
134. 

11. — Though  the  saving  process  may  cause  a 
shortage  of  demand  at  one  time,  say,  during 
a  depression,  the  shortage  will  be  compen- 
sated for  when  the  savings  funds  subse- 
quently come  to  be  invested. — This  view,  though  run- 
ning counter  to  the  one  discussed  under  Point  9,  is  often 
heard.  Both  views  are  wrong.  If  working  forces6  are 


Summary  of  the  Foregoing.  189 

thrown  out  of  employment,  owing  to  lack  of  demand 
caused  by  the  saving  process,  and  are  kept  idle  for  any 
length  of  time,  the  productive  power  thus  annihilated  is 
lost  forever,  and  is  not  compensated  for  by  the  fact  that 
those  working  forces  may  find  employment  again  later  on. 

12. — Trade  reactions  are  necessary  evils,  bound  to 
recur  in  rotation.— If  we  should  ever  be  able  to  guard 
against  Impair  Savings,  we  would  have  the  means  of  do- 
ing away  with  those  extended  periods  of  depression,  and 
the  belief  in  the  inherent  necessity  of  their  recurrence 
would  prove  fallacious. 

******** 

In  the  foregoing  I  have  discussed  some  of  the  views 
now  current  on  extravagance,  economy,  saving  and  some 
other  factors  in  connection  with  their  bearing  on  our 
economic  status.  Most  of  our  economists  believe  that  the 
more  we  save  (without  hoarding)  the  better  we  are  pro- 
tected against  depressions  and  disturbances.  In  contrast 
with  this  belief  I  maintain  that  if  at  times  of  depression 
or  of  slackening  business  we  could  check  the  saving  pro- 
cess, and  could  enforce  more  buying  and  less  accumula- 
tion on  the  part  of  the  wealthy,  we  therewith  could  check 
the  depression.  On  the  whole  our  saving  power  is  too 
large.  In  busy  seasons  too  much  is  accumulated  and  in- 
vested in  new  constructions,  the  latter  fact  again  increas- 
ing the  business  activity.  If  at  such  times  we  had  more 
consumption  and  less  saving,  and  consequently  less  of 
new  constructions,  the  cycle  of  prosperity  would  last 
longer.  We  would  not  so  quickly  arrive  at  a  period  of 
superfluity  of  productive  capital,  with  a  consequent  lull 
in  new  constructions  and  a  change  of  the  saving  process 
from  the  Capitalistic  to  the  Impairing  Form. 

If  we  could  find  a  practicable  method  for  controlling 
and  eventually  limiting  the  saving  activity,  things  would 


190  Summary  of   the  Foregoing. 

soon  shape  themselves  so  as  to  conform  to  that  healthy 
state  of  business  described  on  page  180.  The  demand 
for  working  forces  will  then  be  as  large  as  the  supply; 
there  will  be  employment  for  practically  all  of  them; 
the  feverish  activity  during  a  boom  and  the  subsequent 
period  of  stagnation  will  be  supplanted  by  a  uniformly 
brisk  state  of  business;  the  shifting  and  changing  about 
of  working  forces6  will  give  way  to  a  greater  stability  of 
employment;  of  the  working  forces,  fewer  would  be  en- 
gaged in  new  constructions  and  more  in  the  production 
of  commodities,  which  would  mean  a  larger  allotment  of 
the  fruits  of  labor  to  each  individual,  i.  e.,  a  higher 
degree  of  prosperity. 

Temporary  economic  disturbances  may  not  be  en- 
tirely eliminated,  but  protracted  periods  of  depression 
would  become  impossible. 


ONCE  MORE,  THE   "NEGLECTED  POINT." 

It  was  not  my  intention  when  writing  this  book  to 
present  a  complete  treatise  on  panics  and  depressions, 
following  up  their  origin,  development  and  gradual 
abatement.  All  that  I  have  aimed  at  has  been  to  bring 
out  the  "Neglected  Point,"  and  I  have  branched  out  on 
other  subjects  (for  instance,  the  various  depression 
theories)  no  further  than  necessary  to  elucidate  my  own 
views  and  defend  my  position.  The  object  of  this  book 
is  to  reveal  the  dual  nature  of  the  saving  process,  its 
beneficent  as  well  as  its  impairing  form,  and  to  bring  out 
the  main  features  of  the  latter — notably  that  strange 
duplex  action  which,  on  the  one  hand,  places  investment- 
seeking  cash  funds  in  the  possession  of  the  savers,  while 
on  the  other  it  creates  market  conditions  which  open  up 
opportunities  for  the  investment  of  those  funds — this  at 


Summary  of  the  Foregoing.  191 

a  time  when  the  legitimate  field  of  investment  (new  con- 
structions, etc.)   narrows  down. 

My  investigations  do  not  verify  the  universal  belief 
that  in  the  end  the  saving  activity  will  always  benefit 
the  commonwealth  as  well  as  the  individual  saver.  I 
have  shown  that  it  is  far  from  being  an  unmixed  blessing. 
It  may  harm  as  well  as  benefit  the  community.  It  will 
either  stimulate  business  activity  or  depress  it;  either  en- 
liven the  demand,  or  diminish  it.  If  it  ceases  to  be  useful 
it  at  once  becomes  harmful.  In  its  effects  it  is  either  con- 
structive or  destructive,  never  neutral. 


Before  we  can  find  the  proper  remedy  for  depressions, 
we  must  know  their  cause.  I  have  stated,  in  this  book, 
what  I  believe  to  be  their  true  cause. 

As  a  rule,  the  reader  will  not  consider  a  depression 
theory  complete  unless  it  gives  suggestions  as  to  the 
remedy ;  -such,  however,  I  am  not  prepared  to  offer.  But 
I  dare  say,  if  my  depression  theory  should  be  accepted  as 
the  correct  one,  a  remedy  will  be  discovered.  And  even 
if  a  sweeping  remedy  for  Impair  Savings  could  not  be 
found,  the  knowledge  of  their  existence  and  of  the  harm 
they  entail  upon  us,  would  go  far  in  guiding  us  to  shape 
our  economic  policy,  wherever  legislative  measures  have 
to  be  taken  that  bear  upon  the  subject. 


EXPLANATORY  NOTES. 

1st. — In  this  treatise  the  term  '"savings"  is  meant  to 
cover  all  surplus  earnings:  those  of  the  millionaire  as  well 
as  those  of  the  working  man. 

2nd. — The  term  "capital"  should  always  be  under- 
stood in  the  economic  sense,  meaning  productive  capital, 
or  capital  goods,  like  factories,  houses,  railroads,  ships, 
etc.  In  common  usage  the  term  is  often  applied  to  cash 
funds,  such  as  are  loanable  or  available  for  investment. 
Wherever  the  latter  kind  of  capital  is  referred  to  in  this 
book,  it  will  be  called  ''cash  capital." 

3rd. — The  terms  "new  constructions,"  "new  wealth," 
or  "additional  wealth,"  are  largely  identical  with  "new 
productive  capital,"  but  they  also  include  new  acquisi- 
tions of  what  may  be  termed  "unproductive  capital," 
such  as  houses  occupied  by  the  owners,  hospitals,  schools, 
bridges,  streets,  pleasure  boats  and  vehicles,  and  many 
kinds  of  constructions  not  intended  for  business  purposes, 
in  fact,  all  property  left  in  the  possession  of  the  com- 
munity at  the  end  of  the  year  in  addition  to  what  it 
possessed  at  the  beginning  of  the  year. 

4th. — The  term  "money  market''"  should  be  under- 
stood to  include  not  only  loanable  funds,  but  all  funds 
available  for  investment  in  new  enterprises.  It  does  not 
include,  however,  the  liquid  capital  employed  by  business 
men  in  carrying  on  their  regular  business;  such  funds 
ore  not  available  for  new  enterprises,  nor  for  loaning 
purposes. 

5th. — By  "Bank  Money"  is  meant  the  deposits  of 
business  men  and  others  in  commercial  banks,  subject  to 
check;  their  "money  in  bank."  It  does  not  include  de- 


Explanatory  Notes.  193 


posits  in  savings  banks.  In  the  United  States  it  would  in- 
clude deposits  in  National  banks,  State  banks,  and  most 
of  those  held  by  Trust  banks. 

6th. — The  term  "working  forces"  should  be  under- 
stood to  mean  only  individuals,  such  as  are  engaged,  di- 
rectly or  indirectly,  in  the  production  and  distribution  of 
commodities  or  in  the  creation  of  any  kind  of  wealth; 
workingmen  as  well  as  men  of  other  vocations — manufac- 
turers, farmers,  merchants,  transporters,  capitalists,  etc. 
In  fact,  all  men  who  derive  an  income  from  their  being 
connected  with  a  particular  trade  should  be  considered 
as  constituting  the  working  forces  engaged  in  such  trade 
to  the  extent  of  that  income;  even  the  capitalist  who 
merely  draws  interest  on  the  funds  which  he  advances 
to  participants  in  that  trade. 

7th. — The  term  "Constructive  Working  Forces"  re- 
fers to  such  individuals  as  are  engaged,  directly  or  in- 
directly, in  new  constructions  or  in  the  creation  of  addi- 
tional wealth;3  whereas  those  who  are  engaged  in  the 
production  of  commodities  intended  for  consumption  are 
referred  to  as  "Commodity  Working  Forces."  This  dis- 
tinction does  not  exclude  the  possibility  that  one  and  the 
same  man,  for  instance  a  dealer,  may  partly  belong  in 
the  one  class  and  partly  in  the  other. 

8th. — The  term  "Impairing  Form  of  Investment"  has 
been  chosen  to  indicate  that  an  impairment  of  the  com- 
munity's welfare  is  intimately  connected  •  with  that  form 
of  investment.  But  it  should  be  understood  that  the 
act  of  investing,  as  such,  is  not  the  cause  of  the  impair- 
ment; on  the  contrary,  the  act  of  investing  is  always 
beneficial  to  the  welfare  of  the  community.  The  impair- 
ment comes  from  some  other  cause,  as  explained  in  Chap- 
ter 5,  not  from  the  investment. 

9th. — The  term  "impoverishment"  should  not  be  un- 


194  Explanatory  Notes. 


derstood  to  mean  reduction  to  poverty,  but  merely  "be- 
coming poorer."  A  man  may  become  impoverished  by 
$1000  and  still  be  a  rich  man. 

10th. — The  term  "alienation  of  property"  should  be 
understood  in  a  broad  sense  and  to  include  not  only  the 
selling  of  property  in  cases  of  urgent  need,  but  also  the 
borrowing  on  it,  say,  in  the  shape  of  a  mortgage  or  other 
pledge;  and  the  term  "borrowing"  ("borrower")  should 
also  be  understood  to  cover  both,  borrowing  as  well  as 
selling.  A  very  familiar  instance  where  a  man  borrows 
on  his  property,  or  even  on  mere  credit,  is  furnished  by 
the  "running  behind"  of  a  business  man  who  does  not 
earn  his  expenses  in  times  of  depression  and  whose  bal- 
ance-sheet at  the  end  of  the  year  shows  a  loss  where  it 
used  to  show  a  surplus.  Such  loss  reduces  his  wealth; 
and  unless  he  allows  his  plant  or  his  stock  to  run  down, 
others  will  gain  what  he  loses.  If  at  the  end  of  the  year 
he  has  less  money  on  hand,  others  have  so  much  more ;  if 
his  outstanding  accounts  have  become  smaller,  the  com- 
munity owes  him  so  much  less  and  has  become  relatively 
richer ;  if  he  has  more  notes  outstanding,  those  who  hold 
the  notes  have  acquired  a  kind  of  lien  on  his  property 
(which  amounts  to  an  alienation  on  his  part)  and  at  the 
same  time  have  found  investment  for  their  funds  when 
buying  those  notes.  Just  so  if  the  State's  income  runs  be- 
hind in  years  of  general  depression,  and  if  bonds  are 
issued  to  make  up  for  the  deficit ;  this  gives  the  savers  an 
opportunity  for  investing  their  surplus  earnings;  but  to 
the  same  extent  the  community  becomes  indebted;  i.  e., 
poorer. 


• 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  PINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  5O  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


6  1934  , 


1837 


MAR  14  I960 


MOV 


1945 


6Jan'53JK 


L'BRARY 


JUH2V 


FFB   7 1351. 


-r-^7 r-r 


srrjTO 

1    * — * — • — 


JUN281961 


RFTURNEr 


JUN  0  3 


LD 


DEC  4- 


UL'T      8    UU5 


LD  21-100m-7,'33 


u.  c. 


BERKELEY  LIBRARIES" 


207679 


